Taxation of Non-Residents’ Inheritance of Canadian Real Estate

  • April 22, 2022
  • Birute Luksenaite

As I am writing this contribution to the newsletter, Russia’s war against Ukraine continues to cause apprehension all over Eastern Europe. Even the now-NATO countries in the former Soviet bloc worry that Russia might re-occupy them too, recollecting its post-World War II oppression and nationalization of private property. A client in Europe is­­­ a sole beneficiary of a Canadian estate that owns a house in Ontario. He previously expected to receive his inheritance in liquid funds, but as a result of the uncertainty in his part of the world, he decided to take his inheritance – with the assistance of a discretionary executor – in kind. He feels that his property will be safer in Canada. He is prepared for the Canadian tax implications that will accompany his decision, including dealing with Taxable Canadian Property, rental income taxation and the new Underused Housing Tax.

Subsection 107(2) Rollout of Canadian Real Estate to Non-Resident Beneficiary

To provide some preliminary context - where a deceased taxpayer’s assets first pass to an executor for administration, the estate is generally deemed to acquire such assets from the deceased at their date of death fair market value (“FMV”) (pursuant to paragraph 70(5)(b) of the Income Tax Act (the “ITA”)), with any post-death capital gains accruing to the estate. For ITA purposes, an estate is a trust. For Canadian-resident beneficiaries, subsection 107(2) of the ITA enables a trust to transfer its capital property to its beneficiaries at the property’s cost (which is generally the date of death FMV) in exchange for the beneficiaries’ surrender of their capital interests in the trust. This results in a tax-deferral of accrued capital gains on the transferred property, with the ultimate taxation of such gains taking place in the hands of the beneficiaries, which can be a helpful outcome. With respect to non-resident beneficiaries, a trust is generally unable to complete such “rollouts” of its capital property, except for certain limited types of property, like Canadian real estate, as provided in subsection 107(5) of the ITA. In my client’s situation, a subsection 107(2) rollout of the estate’s real asset is a very helpful option, as the estate has no funds to pay the capital gains tax on the gains that have accrued on the real asset since the benefactor’s date of death. The rollout would allow my client to defer paying Canadian income tax on all the post-death capital gains on the inherited house until he disposes of the house on a sale, gift or on his own death, or changes its use from personal to rental without a subsection 45(2) election.