For some Canadians real estate investment property form a substantial part of their estates. Due to the nature of real estate, it is important to do good estate planning to realize optimum gain and minimize tax implications.

Key Considerations for Real Estate Investment.

• Real estate is not a qualifying investment for the purposes of the Lifetime Capital Gains Exemption.

• Capital gains taxes is usually triggered at death. In addition, there may be probate fees levied against the estate at death.

• Leaving taxable property to a spouse through a spousal rollover in the will defers the tax until the spouse sells the property or dies.

• Apart from the principal residence, real estate often creates a need for liquidity due to capital gains taxes, estate equalization & distribution, mortgage repayment or other considerations.

• Professional advice is often required to select the most advantageous ownership structure (i.e., personal, trust, holding company).

Why is Estate Planning Important?

It is recommended that family issues including estate distribution be addressed with certain types of real estate assets. Estate planning can organize your assets with the objective to ensure that at your death they are distributed according to your wishes:

• to the proper beneficiary(s),
• with a minimum of taxes and costs
• and with the least amount of family discord.

Tax and Estate Planning Strategies for Various Real Estate Holdings.

Principal Residence & Recreational Property.

• If your home qualifies as a principal residence, there is no tax on any capital gains upon sale or transfer of the property. An individual can only have one principal residence and the same holds true for a family unit (for example, both spouses have only one principal residence between them).

• If the sale, transfer or deemed disposition at death of a second house or recreational property results in a capital gain, that gain will be taxable. Selling at a loss will create a capital loss.

• There may be some concern that if the property is left outright to the spouse and the spouse remarries the property may ultimately end up with someone who was not intended as a beneficiary.

To avoid this, a trust could be used to hold ownership of the property. A spousal trust created in the will also accomplishes this while at the same time maintaining the spousal rollover to avoid tax on the gain of the property. In addition, the spousal trust has an added advantage in that it allows the testator to specify who will inherit the property on the spouse’s death.

• Considerable thought should enter into the decision as to how to bequest or liquidate the family cottage or recreational property in an effort to maintain family harmony.

Real Estate Investment Property.

• Sale, transfer or deemed disposition (at death), usually will result in a capital gain or capital loss.

• If the property in question is performing favorably as an investment, it may be desirable to leave it to the surviving family members. In this case, it is recommended that any liquidity requirement for taxes, costs etc. be funded to alleviate the financial burden.

• From a planning point of view, it may be advisable to own commercial real estate through a holding company, depending on the circumstances. If required, the shares in the holding company could be owned by a Family Trust which may have a beneficial income splitting result.

Solving the Liquidity Need.

As discussed, the majority of the taxes resulting from the disposition of real estate upon death can be deferred until the demise of the surviving spouse. The same is true for most of the estate equalization considerations with the family.

The most cost effective method in providing the necessary liquidity in these situations is the use of life insurance. This vehicle provides tax free cash at the time the capital gains taxes are triggered.

Naming a beneficiary on a life insurance policy bypasses the will and is not subject to probate. In addition, the proceeds are protected against creditor claims.

Life Insurance provides for pennies on the dollar a guaranteed low cost alternative to the issue of satisfying the liquidity need at death.

If you have any questions or would like to discuss some of the above you can contact me any time and feel free to use the social sharing buttons below to share this article with a friend or family member whom you think might benefit from this information.