US resident inheriting property from Canadian mother

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uncaD
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US resident inheriting property from Canadian mother

Post by uncaD » 26 Sep 2016 23:19

Hi all,

I am a US permanent resident (Canadian citizen), and my sister (resident of BC) and me are the sole heirs to my mother's (also resident of BC) estate. The Notary Public my mother deals with (not an accountant) has advised her to file annually with the Province of BC to transfer the title of her primary residence to herself, my sister and me in order to avoid probate tax on this property in the event of her death. If we were to do this, the notary advised me to consult with an accountant on my own because she believes that I could be liable for considerable Canadian taxes when the property is sold to settle the estate. She implied that, as a non-resident, I would be subject to regular capital gains tax on the sale as well as a special "non-resident tax" levied on the total value of the property.

I can't seem to find any reference to this "non-resident tax" on the sale of real estate in Canada. Is this actually a thing, and, if so, would someone be able to point me to where I could learn about it?

I am also confused by the capital gains tax angle, especially since this property has been my mother's primary residence since she bought it. Why, for instance, would I be subject to capital gains tax as a non-resident while my sister would not? If it is the case that the heirs would be subject to capital gains tax on the sale, why would we do this just to avoid the relatively minor probate tax?

The alternative the notary suggested is to will the property entirely to my sister and establish a family trust to ensure that I receive half the proceeds when the property is ultimately sold. The cost of setting up this trust would be several thousand dollars.

The property is worth about $365k with a cost basis of about $300k. I am not otherwise subject to Canadian taxation and I have not filed taxes in Canada for almost 20 years.

If anyone here could shed light on this situation before I reach out to a CPA it would be greatly appreciated. Thanks in advance for your time.

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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 10:02

Somehow I think there is some malarky in that Notary Public's recommmendations. Given that your mother's principal residence is not the principal residence of either your sister or yourself, I don't see how either of your sister or yourself can avoid cap gains taxes at some point.

I don't have solid facts to advise, but the following is what I think needs to be investigated......

The first question in my opinion is whether Land Transfer Taxes would be triggered with a change in title from soley your mother, to the 3 of you. I know it can be avoided between spouses, e.g. a title going from one person to joint title between spouses, but am doubtful(?) that same mechanism can be used between parent and children. Land transfer taxes are significant in BC.

Another question is then how does CRA look at this title change. Would CRA deem there has been some transfer of beneficial interest to you and your sister, e.g. 1/3, 1/3, 1/3 between the 3 of you even if no money changes hands? If so, there is no cap gains taxes due immediately since this IS your mother's principal residence, but there will ultimately be cap gains to your sister and yourself when it, as an investment property, is sold using market value at time of title change as the ACB for you and your sister.

On the question of non-resident taxes due CRA, I believe a certain amount of the sales proceeds must be held back temporarily until the proper forms are filed... so that CRA knows it is going to get its pound of flesh. IOW, they don't want 100% of the money leaving the country on an honor system that you, a non-resident, may not honorably pay your share of investment property cap gains taxes to Ottawa. That info can be googled.
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Re: US resident inheriting property from Canadian mother

Post by twa2w » 27 Sep 2016 10:42

Wow, a lot to cover.
The goverment of BC recently imposed a special land transfer tax of 15% on the sale of property to non-residents. I assume the Notary Public was referring to this, meaning you may get charged the tax if your mother adds you to the property as an owner. AFAIK this tax is only applicable in the city of Vancouver. If this applies to you, it would be charged at the time of the property transfer from your mom only to the three of you. When your mom passes and the property is then sold, the special tax only applies only if the purchaser is a non resident and the purchaser pays it

In terms of the capital gains there may be a couple of issues here that the NP is referring to. If you mother adds you and your sister to title today, you now own a share in the house with the value set as of today. If your mother passes away in 10 years and the house has increased in value, your mothers share is tax free as it is her principal residence. But many people think that your share and your sisters Share( if she has another pricipal res) would be subject to capital gains in Canada on the increase in value from the time it was transferred to your name and the time it was sold.
However, I do not believe this is the case as the house remains your mothers principal residence and you did not buy a share in your mothers house. The ownership transfer was to facilitate estate planning only and there was no transfer in beneficial ownership. I may stand corrected on this but my parents did this with my brother and had a tax ruling to this effect. Tax S1 F2 C3. Section 2.9 et Al.

The other complication though in regards to capital gains is your US residency. If title is transferred to partially your name, the US tax authorities, regardless of Canada's rules, may determine you have a capital gain on your share when the house is eventually sold and you may owe taxes in the US.
I am not familiar with tax rules in the US so cannot comment on this.

If title was changed fro your mom's name to the three of you, any tax if applicable would be based on a cost value of 365,000 which is the value at time of transfer. Any increase in value would in theory be attributed equally between the three. Ie if the future sale netted 395,000, your share under any USA tax law would be 1/3 of the 30,000 gain or 10,000.

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Re: US resident inheriting property from Canadian mother

Post by kcowan » 27 Sep 2016 10:59

ISTR that Land Transfer Taxes are waived between parent and child in BC. So the avoidance of Probate is real savings.

The 15% surcharge on property transfers can probably be avoided with a good lawyer. But I would get the opinion of a good US/Cda tax accountant on all aspects of this before acting. You have three interested parties: BC Government, CRA and IRS.
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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 11:36

kcowan wrote:ISTR that Land Transfer Taxes are waived between parent and child in BC. So the avoidance of Probate is real savings
Was curious about this myself so looked it up http://www.sbr.gov.bc.ca/documents_libr ... tt_005.pdf and Yes.

There is also this for posterity http://www.sbr.gov.bc.ca/documents_libr ... tt_003.pdf

So, transfer of title from Mom to Mom/son/dau is exempt. But at a later date after death of Mom, and the property is in the joint names of bro/sis, there is not an exemption if title is subsequently transferred to one or the other (or obviously sold to a third party).
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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 11:44

Also, when it comes eventually to disposal of the OP's share of the real estate, this is what I was thinking of from a Canadian federal/CRA perspective:

http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... s-eng.html

http://www.cra-arc.gc.ca/E/pbg/tf/t2062/README.html

The US - Can tax treaty may exempt the OP from any Canadian taxes due on cap gains on the eventual sale of the property, but as I understand it, the submission of the subject form is critical to re-capture any proceeds temporarily withheld by the RE lawyer/realty firm.

This is separate from BC's new 15% foreign withholding tax in Vancouver (area).
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Re: US resident inheriting property from Canadian mother

Post by deaddog » 27 Sep 2016 11:46

AltaRed wrote:
kcowan wrote:ISTR that Land Transfer Taxes are waived between parent and child in BC. So the avoidance of Probate is real savings
Was curious about this myself so looked it up http://www.sbr.gov.bc.ca/documents_libr ... tt_005.pdf and Yes.

There is also this for posterity http://www.sbr.gov.bc.ca/documents_libr ... tt_003.pdf

So, transfer of title from Mom to Mom/son/dau is exempt. But at a later date after death of Mom, and the property is in the joint names of bro/sis, there is not an exemption if title is subsequently transferred to one or the other (or obviously sold to a third party).
Capital Gains tax exemption is only for principles residence. If they are planning on selling the home, it might be better to leave it in Moms name.
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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 11:57

deaddog wrote:Capital Gains tax exemption is only for principles residence. If they are planning on selling the home, it might be better to leave it in Moms name.
I was referring to the initial title change from Mom to Mom/son/dau regarding Land Transfer Taxes...i.e. being exempt.
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Re: US resident inheriting property from Canadian mother

Post by uncaD » 27 Sep 2016 12:52

Thank you all for your replies, they have been extremely helpful. I have spoken to the notary only briefly on the phone myself, and my understanding at the moment is that this process should allow us to avoid both the probate tax and any capital gains tax due to the CRA, even for my sister and me. I will meet with her in person in the next couple of days to get more details. Assuming the notary knows what she's doing, I think the main issue for me will be how the IRS views this transaction.

I'm still unsure about this "non-resident tax" she insisted I would be subject to on the sale of the property. I asked specifically if she was referring to the new foreign buyer tax in BC, and she said, no, it is a tax that has always been in place. I asked if the tax is on the capital gain or if it an excise tax on the total value of the property, and she said it was on the value of the property. I'm wondering now if she means that I may not be exempt from the BC property transfer tax as a non-resident. The doc that AltaRed linked to merely says that you are exempt if you are a Canadian citizen (which I am) or a permanent resident. Again, I will follow up with her for more details.

As a side note, from everything I've read, it seems to me that "foreign buyer" for the purpose of the 15% foreign buyer tax in BC is defined by citizenship rather than residency status. Can anyone confirm that?

Thanks again!

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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 13:08

uncaD wrote:As a side note, from everything I've read, it seems to me that "foreign buyer" for the purpose of the 15% foreign buyer tax in BC is defined by citizenship rather than residency status. Can anyone confirm that?

Thanks again!
It would seem to me you are exempt http://www2.gov.bc.ca/assets/gov/taxes/ ... couver.pdf and in any event only applies to the Greater Vancouver Area as described.
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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 13:12

uncaD wrote:I'm still unsure about this "non-resident tax" she insisted I would be subject to on the sale of the property. I asked specifically if she was referring to the new foreign buyer tax in BC, and she said, no, it is a tax that has always been in place. I asked if the tax is on the capital gain or if it an excise tax on the total value of the property, and she said it was on the value of the property. I'm wondering now if she means that I may not be exempt from the BC property transfer tax as a non-resident.
See my post above
Also, when it comes eventually to disposal of the OP's share of the real estate, this is what I was thinking of from a Canadian federal/CRA perspective:

http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... s-eng.html

http://www.cra-arc.gc.ca/E/pbg/tf/t2062/README.html

The US - Can tax treaty may exempt the OP from any Canadian taxes due on cap gains on the eventual sale of the property, but as I understand it, the submission of the subject form is critical to re-capture any proceeds temporarily withheld by the RE lawyer/realty firm.

This is separate from BC's new 15% foreign withholding tax in Vancouver (area).
This is what I am pretty sure she is referring too. That would occur when you (and/or your sis) dipose of the property at a later date, after having owned it. Not in the initial transfer from your Mom, nor do I believe in the transfer to you as part of Estate distribution.
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Re: US resident inheriting property from Canadian mother

Post by uncaD » 27 Sep 2016 14:08

AltaRed wrote:
This is what I am pretty sure she is referring too. That would occur when you (and/or your sis) dipose of the property at a later date, after having owned it. Not in the initial transfer from your Mom, nor do I believe in the transfer to you as part of Estate distribution.
Yes, you may be right. The notary was adamant, though, when I questioned her that what she was talking about was a tax calculated on the total value of the sale, not just the cap gains, that only applied to non-residents of Canada. It is entirely possible that I misunderstood her, or that she didn't know what she was talking about. I will get to the bottom of it when I meet with her.

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Re: US resident inheriting property from Canadian mother

Post by ockham » 27 Sep 2016 15:20

What is the amount of "probate tax" that the OP is trying to avoid?? My guess is maybe $5K.

We've been around this mulberry bush many times on this forum. Transferring the parents' home into the joint names of parents and children courts all kinds of potential problems. Figuring out what CRA, and now also IRS, will make of the transaction is likely the least of them. The legal and accounting fees connected with addressing the potential problems properly will almost certainly exceed the "probate tax" that all these efforts are directed at avoiding.

This idea should be put out to pasture, please.

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Re: US resident inheriting property from Canadian mother

Post by AltaRed » 27 Sep 2016 17:15

ockham wrote:This idea should be put out to pasture, please.
:thumbsup: I've pretty much given up floating this issue, i.e. the hoops some people will go through, and stand in the middle of the freeway on without a fluorescent vest, to avoid some probate taxes.

And to remind some who easily forget, besides the costs of the transactions to position all these joint ownerships, there are the residual issues down the road with respect to liens, judgements, spouses and divorces, falling out of relationships, black sheep, addictions, etc.
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Re: US resident inheriting property from Canadian mother

Post by uncaD » 27 Sep 2016 19:11

AltaRed wrote:
ockham wrote:This idea should be put out to pasture, please.
:thumbsup:
I hear ya, and, trust me, I wish I didn't have to deal with this. It was apparently initiated by my 83 year old mother, who likely heard about about it from a friend. She doesn't really understand what is happening, and the NP has not been particularly helpful in that regard. I was kind of blindsided when the the NP realized that the fact that i'm not a resident would complicate it even more on my end and contacted me about it. My sister and I are meeting the NP tomorrow at noon, and I will work on putting the kibash on it. It will probably be tricky to put this genie back in the bottle at this point given family dynamics, though.

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Re: US resident inheriting property from Canadian mother

Post by ockham » 27 Sep 2016 20:23

uncaD wrote:
AltaRed wrote:
ockham wrote:This idea should be put out to pasture, please.
:thumbsup:
I hear ya........ It will probably be tricky to put this genie back in the bottle at this point given family dynamics, though.
Good Luck!! Bear these points in mind:
1. What is the amount of the "probate fee/tax"?? What is the amount of the problem that we're trying to solve?? I'm guessing at about $5K.
2. Most people do not reside in their own home until the time of their passing. They move into an apartment, assisted living, nursing care, etc. The likelihood is, therefore, that the home is sold long before your mom passes. The "probate fee" problem solves itself in other words, in most cases.
3. While the "probate fee" is an entirely hypothetical future problem, there are real upfront present costs to doing the joint ownership transaction, and doing it right.
4. The potential costs of doing it wrong can be huge. (My favourite example: Ma and Pa owned the family farm jointly. Pa died and title passed to Ma alone without probate fees (because of the joint ownership). Ma was so impressed, she put her son on the title jointly. A few years passed, son got into financial trouble, made a bankruptcy assignment. Oops. The major creditor in the bankruptcy, my client, took the position that 1/2 the family farm now belonged to them. Ma was put in the position of losing the family farm or buying out the son's 1/2 interest. All for the sake of saving a "probate fee".)

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Re: US resident inheriting property from Canadian mother

Post by uncaD » 28 Sep 2016 00:53

ockham wrote:Good Luck!! Bear these points in mind:
Excellent points. I think the "is all this trouble worth it for only a few thousand dollars, plus what if one of us goes bankrupt or something..." argument should be pretty persuasive. I think I've already convinced mom, just have to get my sister on board.

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Re: US resident inheriting property from Canadian mother

Post by patriot1 » 28 Sep 2016 19:43

twa2w wrote: The goverment of BC recently imposed a special land transfer tax of 15% on the sale of property to non-residents.
No, the tax expressly applies to buyers who are not Canadian citizens or permanent residents. Whether or not they are physical residents or tax residents (according to CRA) does not figure into it.

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Re: US resident inheriting property from Canadian mother

Post by OhGreatGuru » 29 Sep 2016 19:32

I think you may need to talk to a tax advisor other than this notary public. (is the Notary also your mother's tax preparer and executor?) The only way I can see this making sense is if the Notary is trying to minimize paperwork for him/her self; and perhaps avoid the cost of a professional appraisal; while passing on a completely unnecessary tax liability to you and your sister.

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Re: US resident inheriting property from Canadian mother

Post by blackjack160 » 02 Nov 2017 14:45

I think you've been thinking too much:
1. If the real property is your mother's primary residence, there is no estate tax, no capital gain tax.
2. The 25% NR tax on real property purchase has nothing to do with estate distribution - if you were to receive cash from the estate instead of having your name on your mother's real property.
3. You filed request for clearance certificate T2062 within 10 days AFTER the property is sold (you can also do it before the sale, but must be within 10 days if you file it AFTER the sale). CRA will send you the certificate in about 3 months. On the certificate, you will clearly see if any NR tax has been deducted from the estate. Keep all copies except for copy 3 - it is for the purchaser. If you are not the executor of your mother's estate, then the purchaser is the executor.
4. I don't see why there is a reason for NR tax deduction from an estate. You, the beneficiary, has never actually "owned" the real property. If you are working on your T2062, you will find out that the "purchaser" is the executor of the estate, not the actual buyer of your late mother's property.
5. If, unfortunately, an NR tax has been deducted, you then need to file the tax for the year that the property was sold, and get the return from tax filing.
6. Call CRA if you don't know how to file T2062, they will give you specific instructions on how to complete it.
7. If you are a US resident, the NR tax rate is 15%, if it ever applied.
8. Good luck!

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Re: US resident inheriting property from Canadian mother

Post by twa2w » 02 Nov 2017 22:36

Uh, you are replying to a thread that is over a year old. Not sure if the OP is active on the board anymore.

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Re: US resident inheriting property from Canadian mother

Post by adrian2 » 02 Nov 2017 23:27

twa2w wrote:
02 Nov 2017 22:36
Uh, you are replying to a thread that is over a year old. Not sure if the OP is active on the board anymore.
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