Sunday 20 May 2018

Estate tax implications of not leaving the "empty nest"

So your kids have grown up and moved out and you're seriously considering whether to sell the 'empty nest' and move on or not.  It's too much house for you, but you're not sure you want to leave behind the memories. 

Thank goodness we live in Canada where there are no estate taxes so there's nothing like that to worry about if you stay, right?

Except there are. Sort of.

While we don't have an outright tax on the estate, we do have some taxes to keep in mind, even besides the estate filing a return and paying tax still on any income, interest or capital gains.

For one thing, there's the [Estate Administration Tax], more commonly known by it's old name "Probate Fee".  Of course, you can call it a fee but it's paid to the government so what's the difference?  At least the new name is more honest, it's a tax.  And the amount of the EAT is based on the total value of the estate: 0.5% on the first $50,000 and 1.5% on the rest.  Considering that our homes are usually one of our largest assets, they will typically contribute a significant portion of the EAT.  And the tax has to be paid up front before a Certificate of Appointment as a Trustee can be received, which is generally necessary to get funds released from banks or to access safety deposit boxes and so on.  If the family isn't prepared for this, it can be an unpleasant little surprise.

Another issue with the home when it goes into the estate is the capital gains tax.  As a personal principal residence, the house is exempt from capital gains.  However, that only applies up to the date of your passing.  The house will obviously be sold after your death by the estate.  And any increase in value from the date-of-death to the date of sale (ie. sale price) WILL be capital gains taxable on the estate trust's tax return.  Not an upfront burden on the family, at least, but your Executor has to be ready and plan accordingly and it is a tax that needs to be paid.

I'm not suggesting you have to move out of your house right now - your personal happiness and security are most important - but it doesn't hurt to consider how staying might have an impact on your estate and your family after your passing.

And there are many ways to deal with wealth transfer outside of selling the home.  Talk to your lawyer or financial advisor about what's best for you.

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