# Estate question about principal residence



## contrarian (May 20, 2017)

How does an estate work? Say there is 10k of interest. Does the estate pay the tax on the interest or does the estate issue t3 slips to beneficiaries? 

Second question:

My brother was sole beneficiary of my mother's house when she died. I assume his adjusted cost is fmv at date of death. When he sells the property, he will pay capital gains tax (assuming he does not declare this his principal residence) on increase in value since death. Anyway, how does cra determine fmv? Are they strict? Fmv has gone up substantially. He signed a promissory note to me as part of estate planning whereby he has to pay me half the proceeds of house sale. If he pays me, but cra reassesses the capital gain, I guess he is on the hook for extra tax? Not sure how common this strategy is. 

I guess he has option of saying it is his principal residence. He has two other houses. Thanks


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## AltaRed (Jun 8, 2009)

You don't say when this $10k of interest was earned. Before death or after death? If before death, taxes are payable on the T1 Final Return for the deceased. If post-death, the the interest can be paid by the T3 Trust Return.....or the interest can be passed through to the beneficiaries with the issuance of a T3 tax slip (taxable in the hands of beneficiaries rather than the estate). There are transistion rules in effect starting 2016 whereby Trust tax rates are slowly being consoldiated over a few years into one 'high' rate. That is to motivate estate trustees to 'push' income to beneficiaries via T3 tax slips and avoid continued (unreasonable use of testamentary trusts) as a tax reduction strategy.

ACB will be the FMV at time of death. To establish FMV, get a certified appraisal. Municipal tax assessments do not hve to be accepted by CRA nor are Realter 'market assessments'. They can arbitrarily assess their own value if you don't have a certified appraisal at time of death. This is in the interest of both your brother and yourself. You really wouldn't stiff your bro on extra cap gains taxes if he had to pay, would you? OTOH, would you want some of it back if the cap gains tax was less than assumed? Since your bro has the option to determine which of his residences will be his principal residence, this can make a huge difference for both him and you. If I was him, I'd make this property an investment property....Why would I burden myself to 100% cap gains when I can lower it to 50% cap gains. Sit down and sort this out in a fair even way.


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## Jimmy (May 19, 2017)

1) Using your example, it depends on how much of the income the trust pays to the beneficiary. You set up a trust that holds the property ( the estate) and decide the income it pays to any beneficiaries. If you pay say 5 k to the ben and the trust keeps 5 k they each will pay tax. The trust is considered an individual for tax as well and pays tax on April 30. 

The trust issues a t3 to the ben for his 5k at tax time too usually late march and the 5 k would appear as 'interest income on the t3 slip ( div inc, cap gains, other inc can also be paid). 

I know w the Liberal tax changes Trust income is taxed a the highest rate so it is best to pay all Trust income out to the beneficiaries as they are likely in lower tax brackets ie tax inc < 220K

2) I believe the fmv for cost will be known from the last tax return for your mother as she would have had to have disposed of the asset at fmv. He can list it as his principle residence. It maybe the best option if that property has gone up the most of all his properties

hope that helps.


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## contrarian (May 20, 2017)

Oh boy, this is complicated. I will have to study up on this. You definitely brought up some worrying issues. I'll probably have some more questions later after I research this. Thanks very much, guys.


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## AltaRed (Jun 8, 2009)

Jimmy said:


> It maybe the best option if that property has gone up the most of all his properties


I disagree (in most cases) because if the brother uses this residence as a principal residence (and he really owns only have of it because of the 50% he will pay the OP upon sale), he is then making another 100% owned property as an investment property. He is essetially 'carrying' the OP's cap gains tax burden on his own shoulders. There is a way to fix it... The promissory note should say that the bro only gives the OP his 50% share 'net of selling costs and any cap gains taxes paid'. There is no way the OP should get a free ride on the sale of the property.


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## Jimmy (May 19, 2017)

AltaRed said:


> I disagree (in most cases) because if the brother uses this residence as a principal residence (and he really owns only have of it because of the 50% he will pay the OP upon sale), he is then making another 100% owned property as an investment property. He is essetially 'carrying' the OP's cap gains tax burden on his own shoulders. There is a way to fix it... The promissory note should say that the bro only gives the OP his 50% share 'net of selling costs and any cap gains taxes paid'. There is no way the OP should get a free ride on the sale of the property.


 I was just saying generally it is best to designate the princ res as the property of his which has had the greatest capital gain. But yes specifically here that is not the case as as you say they are 'sharing' this property.


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## Eclectic12 (Oct 20, 2010)

Jimmy said:


> ... 2) I believe the fmv for cost will be known from the last tax return for your mother as she would have had to have disposed of the asset at fmv ...


Trouble is without some form of documentation, should CRA decide that FMV on the tax return is too high or low, what then?

If the OP's brother can make it principal residence, it won't matter. If not, why not have some documentation to show the FMV as more than the executor's guess?

When my mom and aunt wrapped up my uncle's estate - their guess would have been much higher than what the house eventually sold for. Getting documentation meant a lower CG after death to report.


Cheers


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> Trouble is without some form of documentation, should CRA decide that FMV on the tax return is too high or low, what then?
> 
> If the OP's brother can make it principal residence, it won't matter. If not, why not have some documentation to show the FMV as more than the executor's guess?
> 
> ...


I agree the FMV listed in the mother's tax return is meaningless....since it is a principal residence with no cap gains tax payable. The 'only' fair way to establish FMV for brother (and the OP) is via a formal appraisal (in the event it is NOT used as a principal residence by the brother). As I mentioned before, if I was the bro I would not use it as a principal residence (50% basis) when another property I own would then be an investment property on a 100% basis. 

How else would the bro and the OP establish FMV for the purposes of any cap gain calculation? F stands for 'fair' after all.


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> I agree the FMV listed in the mother's tax return is meaningless....since it is a principal residence with no cap gains tax payable ...


The issue for me is not CG or principal residence but that the executor/accountant are making up a number. Where CRA accepts that number - it all works out. Should CRA challenge it - documentation after the fact is rather difficult to obtain versus being proactive.




AltaRed said:


> ... The 'only' fair way to establish FMV for brother (and the OP) is via a formal appraisal (in the event it is NOT used as a principal residence by the brother) ...


Fair to whomever or not ... not documentation makes it harder to change CRA's mind, should a different FMV be in the air.


Cheers


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## Jimmy (May 19, 2017)

AltaRed said:


> I agree the FMV listed in the mother's tax return is meaningless....since it is a principal residence with no cap gains tax payable. The 'only' fair way to establish FMV for brother (and the OP) is via a formal appraisal (in the event it is NOT used as a principal residence by the brother). As I mentioned before, if I was the bro I would not use it as a principal residence (50% basis) when another property I own would then be an investment property on a 100% basis.
> 
> How else would the bro and the OP establish FMV for the purposes of any cap gain calculation? F stands for 'fair' after all.


I was assuming the property was appraised at time of death by some one.


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## AltaRed (Jun 8, 2009)

Jimmy said:


> I was assuming the property was appraised at time of death by some one.


The OP has not stated that. It should have been done given the brother was bequeathed the house outright (in fairness to estate division to all beneficiaries), but I suspect a formal appraisal might have only been done if the province required it to validate value in the Statement of Assets for probate. CRA certainly wouldn't need it... it having been a principal residence.


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## redsgomarching (Mar 6, 2016)

when mother dies deemed disposition o nthe property at time of death (need to be filed) and registered while doing the estate planning. if that property was her principal residence then she would have no tax penalty on the house assuming she lived there.

your brother would inherit the house with the ACB being whatever the FMV was at time of disposition and would only get CG if he sells it and doesnt live in it.


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## Nerd Investor (Nov 3, 2015)

Unless I've missed it, then we don't really know the time frame here. But if op's brother owns the house for less than two years, he can probably use the principal residence exemption without really hurting himself much due to the favourable "+1" in the formula: (1+designated number of years) / total years owned. Yes, he's still technically giving up a year he could otherwise use on his other properties but if this place has appreciated substantially in that short a time frame, he likely still comes out ahead when you consider the substantial gain and the fact it's being realized soon vs years down the road (time value of money and all that jazz).


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## Jimmy (May 19, 2017)

AltaRed said:


> The OP has not stated that. It should have been done given the brother was bequeathed the house outright (in fairness to estate division to all beneficiaries), but I suspect a formal appraisal might have only been done if the province required it to validate value in the Statement of Assets for probate. CRA certainly wouldn't need it... it having been a principal residence.


It depends on who did the tax return. If it was a CPA it would be likely. The CRA also often requests proof of FMV for real estate and capital property on the last return.


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## AltaRed (Jun 8, 2009)

Jimmy said:


> It depends on who did the tax return. If it was a CPA it would be likely. The CRA also often requests proof of FMV for real estate and capital property on the last return.


The CRA would (should) ask on investment (real) property (and capital property). CRA doesn't care about a principal residence. But the province should want to know for probate fees.


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