To add to it all, the process of settling the estate of the deceased can be frustrating and complicated, and can place a strain on familial relationships. This is even more so if real estate is in the mix of the assets of the deceased.
Deemed Disposition of a Non-Principal Residence
Well, when a person dies, the government considers that the person disposed of (as in sold) all of his or her capital assets immediately before death. It’s called “deemed disposition”. Capital assets are significant pieces of property - the ones that tend to appreciate in value. The assets are all still there, but since the government considers they have been sold, capital gains tax is triggered, covering the period from the purchase to the deemed disposition of the asset. The sole exception is the principal residence of the deceased.
Capital gains tax are the taxes owed on the increase in value of capital assets. For example, for a house bought for $300,000 and sold for $700,000, capital gains tax would be due on $400,000.
Since the assets are all still there, deemed disposition can lead to a cash headache. The inheritors might have to sell a property just to pay off the government.
That, however, is just the half of it.
Deemed Disposition of a Principal Residence
Let’s say, as will be the case for many people, the capital asset was the home of the deceased. Well, that starts out as a good thing - the capital gains tax would not apply. However, the home is still transferred from the deceased to his or her estate, so, it has a new owner.
A new owner you ask? Well, the estate is seen at law as being a “legal person”, separate from the deceased and separate from the inheritors.
What does that mean? You guessed it! It restarts the clock on the capital gains tax! If the inheritors have the estate hold on to the home for years, the estate will eventually owe capital gains tax at the time it transfers or sells the home. In the case of a transfer, that of course can lead to that same cash headache. The property may have to be sold or mortgaged, just because it wasn’t transferred in a timely fashion.
When the time of transfer comes, there are a number off steps to be followed.
Probate, Transmission and Transfer
First, probate must be done. That is the step, in court, through which the Will is "approved", and the executor is empowered to act.
Second, transmission must take place. That is, a transfer from the deceased person to the executor of the deceased person, in trust. (That is, not personally.) To undertake transmission, the executor must complete a Sam completes a "Declaration of Transmission" and files it at the Land Titles Office, along with some supporting documents. Once processed, the executor takes title, in trust, and is responsible for keeping the property insured, and taking care of the ongoing house bills.
Third, a transfer must occur. That is, the house must be given to the person the deceased intended should have it. To undertake a transfer, the executor must complete a "Transfer of Land", which must also be accompanied by some other documents, and filed with the Land Titles Office. A Transfer of Land can also be used to sell the house to someone who isn't an estate inheritor, such that the resulting money is distributed to inheritors instead.
Capital gains? Transmissions before transfers? The impact of delays by the executor?
It is all proof positive that on matters concerning Wills and Estates law in Ontario, and in most other places for that matter, a terrain that appears serene can actually be full of unknown trip wires. To avoid stumbling, it is best to consult a professional. With offices in Toronto and Ottawa, and the ability to provide legal assistance in all parts of Ontario, we can readily assist with estate administration concerns. We can be reached by phone at 1-888-59-WILLS. You can also set up a consultation right on our website.