The New Landscape of Capital Gains Tax on Inherited Properties

Bernard Aybout (Virii8)

1 year ago

capital gains tax on inherited properties

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Canada’s 2024 Capital Gains Tax Hike: Impact on Inherited Real Estate Properties

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capital gains tax Canada 2024
inherited property capital gains tax
principal residence exemption Canada
estate planningns
selling inherited property Canada

Tags: 2024 federal budget, capital gains tax, inherited property, estatCanada real estate

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Alt: A Canadian family home, representing a property that could be passed to heirs.

The 2024 federal budget proposal in Canada includes a significant change to how capital gains are taxed – specifically, increasing the capital gains inclusion rate to 66.67% (two-thirds) for annual gains exceeding $250,000. This marks a notable shift from the long-standing 50% inclusion rate, and it has major implications for real estate assets, especially inherited properties. In this comprehensive analysis, we break down the proposed tax change and explore how it affects inherited real estate, distinguishing between primary residences and **secondary (investment or valso delve into how estate taxes work at death, the challenges these rules pose for beneficiaries, and the legal/tax implications when parents hold properties in their own name to safeguard their children’s inheritance. Finally, we offer strategic planning advice – from timing property sales to engaging professional advisors – to help families navigate these changes.

(Note: As of early 2025, this budremains unimplemented – it was deferred to 2026 and faces political uncertainty. Nevertheless, understanding its potential impact is crucial for sound estate and tax planning.)

Budget 2024’s Capital Gains Inclusion Rate Change – What’s New?

Under current Canadian tax rules, only 50% of a capital gain is taxable (the “inclusion rate”). For example, if you sell an asset and realize a $100,000 gain, $50,000 is added to your taxable income. This 50% inclusion rate has been in place for over two decades, benefiting investors and real estate owners by taxing only half of their capital appreciation.

Budget 2024 proposes a two-tier inclusion rate: the portion of annual capital gains above $250,000 would be taxed at two-thirds (67%), while gains up to $250,000 would still be taxed at the 50% rate. Corpoost trusts would see a full jump to the 67% inclusion rate on all gains (they don’t get the $250k threshold). In practical terms, individual taxpayers continue to enjoy the old rate on moderate gains, but large gains face higher taxation. For instance: if an individual realizes a $350,000 capital gain in one year (e.g. from selling an investment property), the first $250,000 is taxed on 50% of the gain, and the remaining $100,000 is taxed on 67% of the gain. That means $175,000 would be taxable from the first $350k (50% of $350k), plus $67,000 taxable from the excess $100k (67% of $100k). The total taxable capital gain becomes $242,000, significantly higher than the $175,000 that would be taxable under current rules for the same $350k gain.

This change was touted as a move toward tax fairness and increased revenue. It was scheduled to take effect for dispositions on or after June 25, 2024. However, the implementation was postponed to January 1, 2026 to give Canadians more time to adjust, and there have been indications from government officials that the increase may be canceled entirely. Still, it remains important to consider “what if” scenarios, as similar capital gains tax hikes could resurface in future budgets even if this particular proposal is shelved.

To summarize the proposed inclusion rate rules (as originally announced):

Before the change (Current Law): 50% of any capital gain is taxable for everyone (individuals, trusts, corporations).
After the change (Proposed): 67% of capital gains exceeding $250,000 (per individual per year) would be taxable, with the first $250k of gains still at 50% inclusion for individuals. Corporations and trusts would have 67% inclusion on all gains. (Notably, each individual owner gets their own $250k threshold – so a couple could together shield $500k of gains at the lower rate in a given year).

In effect, high-dollar capital gains could face a much larger tax bill. Tax experts estimated that taxable income from a given large gain would rise by one-third under the 67% regime. For example, BDO Canada illustrates that a $100,000 gain which currently produces $50,000 in taxable income would generate $66,700 in taxable income if the new inclusion rate applies (assuming the $250k allowance is already used). This translates to a significant tax increase on that gain. In real dollars, consider a dramatic scenario: a family cottage bought for $100,000 decades ago and now worth $1,000,000 at sale or death – that $900,000 capital gain currently would add $450,000 to income (50% inclusion) triggering perhaps around $225,000 in tax (depending on the exact marginal rate). Under the proposed 67% inclusion (if the $250k threshold is exceeded), as much as $600,000 of that $900k gain would become taxable income, pushing the tax bill to roughly $320,000 – a substantially higher hit. Clearly, the stakes are high for anyone with large unrealized gains, which is often the case for real estate held over many years.

Inherited Properties: Primary Residences vs. Secondary Properties

When it comes to inheriting real estate, the type of property – principal residence or secondary property – makes all the difference in tax treatment. Canada does not have a direct “inheritance tax” on the value of assets received by beneficiaries. Instead, the deemed disposition at death triggers capital gains tax on the deceased’s final tax return as if their assets were sold at fair market value right before death. The one big exception is the Principal Residence Exemption (PRE), which the government has pledged to maintain in full.

Primary Residence: If the property was the deceased’s principal residence for all (or virtually all) the years they owned it, any capital gain accrued is fully tax-free under the principal residence exemption. Neitherr the inheriting beneficiaries will owe capital gains tax on that property at the time of transfer. In practical terms, if your parent’s home was their only primary home and they leave it to you in their will, the estate pays no capital gains tax on that transfer. The 2024 budget changes do not alter this exemption – the government explicitly noted that Canadians will “not pay capital gains taxes when selling their home”, keeping any capital gain on a principal residence tax-free. This means inherited primary residences remain protected from capital gains tax on the final return of the deceased, just as before. (Keep in mind, if the home was not the principal residence for every year – e.g., it was a rental for a few years – a portion of the gain coulst scenarios where the family home is passed down, no tax applies at death.)
Secondary/Investment/Vacation Property: Inherited properties like cottages, vacation homes, rental houses, or any real estate that was not the deceased’s principal residence do not enjoy that exemption. These are treated like any other investment asset. At death, the estate must report a deemed sale at market value and any capital gain is taxable to the estate【】. The key point is that the estate is responsible for the tax, not the beneficiary directly. But this tax bill will reduce what’s left for the beneficiaries – or even force the sale of the property by the estate if there isn’t other cash to pay the tax. Under current law, only 50% of the gain is taxed; under the proposed rules, a large gain could see 67% inclusion above the threshold.

Consider a scenario: **You inherit your parents’ cothas vastly appreciated. Say your parents bought the lakefront cabin decades ago for $250,000, and it’s worth $1.5 million at your father’s passing. That’s a $1.25 million capital gain. Because it’s a secondary property, the estate must include half that gain ($625,000) as income currently – leading to a tax bill of roughly $158,000 if we assume a combined ~25% marginal tax rate on that amount. If the new rules applied, the first $250k of gain would still be at 50%, but the remaining $1,000,000 would be at 67% inclusion, resulting er taxable amount (and higher tax owed). This illustrates how inherited vacation homes and rentals could trigger hefty taxes for an estate, especially under higher inclusion rates. If the estate doesn’t have other liquid funds to cover the tax, the executor might be forced to sell the property to pay the CRA before transferring anything to the heirs. This is a common outcome – many families unfortunately have to put a beloved family cottage on the market because the “death tax” (capital gains on death) creates a bill that the beneficiaries can’t afford to pay while keeping the property.

Why the distinction matters: If you inherit a tax-free principal residence, you receive it at a stepped-up cost (the value at death) with no from the estate for that asset. If you inherit a taxable secondary property, the estate has settled the capital gains tax up to the date of death (reducing the overall inheritance). Importantly, once you, the beneficiary, assume ownership, there is no immediate tax on that inheritance itself – Canada doesn’t tax the act of inheriting. You would only face capital gains tax in the future if you later sell the property and it has risen in value since the date you inherited it. In other words, inheriting property gives you a new cost basis equal to the value at inheritance, and any future appreciation from that point on would be your capital gain. (If you move into the inherited home and make it your principal residence going forward, you could potentially shelter that future growth via the principal residence exemption; if you keep it as a second property or rental, then future growth will be taxable upon your sale.)

With the proposed inclusion rate increase, the impact on inherited properties is essentially that the estate of the deceased might owe more tax on large gains, leaving less for the beneficiaries or complicating the transfer. For a primary residence, nothing changes (still tax-free at death). For a second property, the portion of the gain above $250k would incur a bigger taxable portion. Many estates with cottages or rental buildings have gains wt threshold due to decades of appreciation, so this change could bite hard. As one tax lawyer noted, “if it was a secondary residence, say a cottage, then it would be subject to capital gains tax when it transfers to the beneficiary… the estate would be responsible for paying that tax” – and under the higher inclusion rate, that estate tax bite gets deeper.

Estate Taxes at Death and Challenges for Beneficiaries

It’s important to understand how estate taxes work in Canada so you can see how these new rules complicate things. Canada doesn’t levy an inheritance or estate tax in the American sense; instead, the final tax return of the deceased includes all capital gains from a deemed sale of their assets at death. This means before any assets pass to your heirs, your estate must pay off the tax on any accrued gains. The executor will file a final T1 tax return (sometimes called a “terminal return”) reporting income including those deemed capital gains, and any tax due is paid out of the estate’s assets.

Key points about estate taxation:

Deemed Disposition: At death, all capital property (investments, real estate, etc.) is treated as if sold at fair market value. This is called a deemed disposition. If there’s a gain, it’s taxable (with the inclusion rate applied). If there’s a loss, it could offset other gains. The executor must handle this on the final return.
Spousal Rollover: Assets left to a surviving spouse (or common-lawree** at death, due to a rollover provision. Basically, if you leave property to your spouse (or a spousal trust), the deemed disposition can be deferred – no capital gains tax is triggered, and the spouse “steps into your shoes” with your original cost basis. This is a crucial estate planning tool for married couples, allowing the tax on gains to be postponed until the surviving spouse later sells the asset or dies. But note: the 2024 proposal does not change the spousal rollover rules. It means many people can defer these gains to the second death, but eventually the tax comes due when the last spouse passes and leaves assets to the next generation.
No Tax for Beneficiaries on Receipt: If you are a beneficiary (child or otherwise) inheriting assets, you do not pay tax simply for inheriting. The estate pays any capital gains tax before you get the asset. For example, if you inherit a rental property, the estate’s final return covers the accrued gains up to that point. When you receive the property, it’s already after-tax. (There could be probate fees on the estate’s gross asset value in some provinces, but that’s separate from income tax.) You would only pay taxes later if you sell the asset or if it generates income while you hold it.
Estate Liquidity and Fairness Issues: Problems arise if an estate is “asset-rich but cash-poor.” Real estate is illiquid – you can’t pay a tax bill by slicing off a piece of a cottage. If the deceased’s estate doesn’t have sufficient cash or liquid investments to cover the capital gains tax on a property, the executor may have no choice but to sell that property to raise funds for the CRA. This scenario often occurs with family cottages or farmland that parents hoped to keep in the family. Higher inclusion rates would increase the tax liability, making it even harder to keep a property unless advance planning (like insurance or setting aside funds) was done. Additionally, when multiple beneficiaries are involved, perceived fairness can be an issue. For instance, if one child inherits the taxable cottage (and the associated tax bill paid by the estate) while another child inherits an equivalent value in cash or the tax-free principal residence, the first child’s inheritance effectively “cost” the estate more. This can cause resentment or imbalance if not accounted for. Advisors note that giving one heir a high-value asset that triggers tax while another gets a lower-tax asset can create conflicts, especially if not communicated in advance.
Trusts and the $250k Threshold: A technical wrinkle from the 2024 proposals: if your estate becomes a Graduated Rate Estate (GRE) (a testamentary estate that exists up to 36 months after death), it can still qualify for its own $250,000 capital gains threshold at the lower inclusion rate, similar to an individual. This was clarified in draft legislation – initially there was confusion if estates or trusts would get the benefit. Essentially, if your estate sells assets during administration, the first $250k of gains could be taxed at 50%. Similarly, certain trusts for disabled beneficiaries get a threshold. However, most ongoing trusts (after the estate period) would not have a personal threshold – unless gains are flowed out to beneficiaries, in which case the beneficiaries can use their own thresholds. What this means in plain language: estate executors and trust administrators will need to plan the timing of asset sales and distributions carefully to maximize use of any available $250k lower-rate allowance. Failing to do so could mean paying more tax than necessary.

In short, higher inclusion rates at death can greatly increase the “tax bite” on intergenerational transfers. Without planning, your heirs might see a larger portion of your estate go to taxes, or even lose a cherished property because the estate had to sell it. A financial commentator from RBC Wealth Management put it plainly: with a higher inclusion rate, “that’s going to result in a larger tax bill” on the final return, so for those who anticipate a large capital gain at death, “you may need to review your estate plan, maybe look at your life insurance coverage, and work with your team of advisors”. We’ll discuss such planning strategies shortly.

Holding Property in Parents’ Names to Protect Inheritance – Risks and Implications

Many parents are keen to preserve assets for their children and may be hesitant to transfer property to the kids too early. They might worry about a child’s marital breakdown or spending habits, and thus choose to keep real estate in the parents’ name until death to ensure it ultimately goes to the kids as intended. While the intention is to “protect children’s future inheritance”, holding onto a property until death (especially a secondary property like a cabin or investment condo) has its own set of implications:

Bigger Tax at Death vs. Earlier Transfer: If parents hold a second property until they die, the entire unrealized capital gain will be triggered on the final return, potentially at the higher inclusion rate if the gain is large. If instead the parents gifted or sold the property to the children during their lifetime, that would also trigger capital gains tax (since Canada treats a gift as a deemed sale at market value) – but it might be at a time when the inclusion rate is lower (currently 50%). In fact, some estate planners considered realizing gains before the inclusion rate hike kicked in, to lock in the 50% rate. With the proposal looming, one strategy was for owners to “intentionally trigger the anticipated gains, through gifting or other mechanisms, prior to the higher inclusion ratio” coming into effect. However, triggering tax now means paying it sooner; not everyone can afford that, and it foregoes the chance that the tax rules might be softened or the gain never materializes if the property value drops.
Joint Ownership with Children: A common approach to ease inheritance is adding an adult child as a joint owner on the property (often done with bank accounts too). The idea is that upon the parent’s death, the property will pass directly to the child by right of survivorship, bypassing probate and making for a smooth transfer. Be cautious with this approach. From a tax perspective, adding a child on title for a property that is not the parent’s principal residence can constitute a deemed disposition of that portion of the property at that time. For example, if you add your daughter as 50% joint owner of your rental condo today, you are, in CRA’s eyes, transferring 50% of the condo to her at today’s market value. That means you (the parent) would have to report capital gains on that 50% as if you sold it – potentially an unwanted tax surprise. It may be possible to add a child as joint owner “in trust” (meaning the beneficial ownership is intended to remain with the parent until death) to avoid the immediate tax hit, but new reporting rules for trusts have made this strategy more cumbersome. Additionally, once a child is on title as an owner, legal risks come into play – their share of the property could be exposed if they face lawsuits, debts, or divorce. Canadian courts presume, in many cases, that the child holds the property in trust for the parent (if it was a gratuitous transfer), but each situation can be complicated. The bottom line: don’t add children to property title without consulting a professional, as “significant legal and tax consequences” can arise.
Keeping Control vs. Early Inheritance: By retaining ownership, parents keep full control of the property (they can decide to sell or change plans) and protect it from any misadventures the child might have while they are alive. The trade-off is a potentially larger tax burden later. If the property instead is transferred to the child earlier (either as a gift or bargain sale), the parents take the tax hit at that point, but any future appreciation is out of their estate. That future growth accrues to the child – meaning when they eventually sell or die, they’ll handle those future gains. In some cases, parents choose to transfer gradually via a family trust or an estate freeze transaction, especially for cottages or rental properties expected to keep rising in value. This can cap the parents’ tax exposure at a certain date’s value and pass the growth to the kids (sometimes using shares of a family holding company for investment real estate). Such techniques are advanced and require professional guidance, but they highlight that there are options to spread out tax liability across generations.
Multiple Properties and Principal Residence Choices: If parents own both a city home and, say, a cottage, only one property can be designated as the principal residence for any given year (prior to 2016, families could only designate one property per family unit per year). Some parents have the flexibility to choose which property to designate as principal residence for tax purposes – typically done when one property’s gain is much larger than the other’s. For example, if the cottage appreciated far more than the city house, the family might decide to designate the cottage as the principal residence for most years to shelter that big gain, and accept that the city home will face some tax on sale or at death. This is a nuanced decision that can save a lot of tax if done right. However, the principal residence exemption cannot fully cover two properties at once; it can only be split by years of ownership. Parents holding multiple properties should consult a tax advisor to allocate the principal residence exemption optimally – especially before one of the properties is sold or transferred. The 2024 inclusion rate hike doesn’t change how the principal residence rule itself works, but it raises the stakes on any portions of gains that end up taxable (making the correct designation of principal residence periods even more valuable).

In summary, keeping a property in the parent’s name until death ensures the parent retains control, but it guarantees a tax event at death that could be larger under the new rules. Transferring earlier can reduce the estate tax later (or avoid the higher inclusion rate if done while the rate is still 50%), but it comes with its own immediate costs and risks. There’s no one-size-fits-all answer – the “right” approach depends on the family’s circumstances, the parents’ financial security, the children’s situations, and of course the magnitude of the capital gain involved. What is clear is that any such decisions should involve legal and tax professionals. As one estate lawyer advises, “any dealings with real property may have significant legal and tax consequences, so it is highly recommended to receive the appropriate advice from professionals before moving forward”.

Strategic Planning Tips for Families: Navigating the Changes

Given the complexity and potential cost of these new capital gains rules, careful planning is more important than ever. Whether you’re anticipating an inheritance or planning to leave property to your heirs, here are strategic considerations:

1. Be Mindful of Timing – When to Sell or “Trigger” Gains

If you expect the inclusion rate to rise (or any other tax increase), timing your property sale or other dispositions can save a substantial amount. With the 2024 budget proposal, there was a window of opportunity before the effective date (and now until 2026, given the deferral) to realize gains under the 50% rate. Families have been considering selling or “crystallizing” gains early on secondary properties to beat the tax hike. For example, if an elderly parent was already thinking of selling a rental property or if the family was open to selling a cottage, doing so before the inclusion rate increases could lock in the lower tax cost. As BDO Canada noted, a $100,000 gain results in $16,700 less taxable income under the 50% rate than it would under 67% – and that difference multiplies for larger gains, potentially keeping tens of thousands more in the family’s hands rather than paid in tax.

That said, tax should not be the sole driver. Market conditions, sentimental value, and family use of properties also matter. If you’ve inherited a property and are deciding whether to keep it or sell, consider factors like: Do you have to sell it to pay the estate’s tax bill? (If yes, timing is often dictated by that – sometimes selling sooner is necessary to avoid interest or penalties on the tax owed.) Is the property expected to continue appreciating? Keeping it might yield more growth, but remember future growth will also be taxable when you sell. Are maintenance costs, insurance, and possibly rental management worth it? Some heirs find an inherited home is more burden than blessing and choose to sell promptly. Others may hold onto a property (like a cottage) if it has strong sentimental value or utility for the family, accepting the ongoing costs.

If you plan to keep an inherited property for the long term, be aware of the capital gains that will accrue from the date you inherited to the date you eventually sell. If it’s not your principal residence in the interim, all that appreciation will be taxable for you. In such cases, monitor the property’s value and consider selling at a strategically low-tax time (for instance, in a year your income is lower, to fall in a lower tax bracket, or spreading the sale via a capital gains reserve if using a conditional sales agreement over several years). While the first $250k of your gains each year would be at 50% inclusion, any large gain beyond that in one year would face the 67% inclusion – so spacing out sales or gains across tax years might minimize hitting the higher rate in a single year.

Lastly, given the current uncertainty: if the government indeed cancels the 67% inclusion rate increase, the rush to trigger gains may subside. But one should stay alert – tax policy can change with future budgets or governments. If not 2024, another proposal could target capital gains down the line. Being proactive rather than reactive – i.e., regularly reviewing your portfolio for outsized unrealized gains and deciding when it makes sense to realize them – is a sound practice.

2. Engage Tax and Estate Planning Professionals Early

This cannot be overstated: consult with a qualified tax advisor or estate planning lawyer when dealing with inheritance and capital gains issues. Professionals can identify opportunities and pitfalls that most people overlook. For example, they can help with modeling the tax implications of different scenarios – What if Mom sells the rental property now versus holding it until death? How much tax in each case, under current and proposed rules? – so your family can make an informed decision. They may recommend strategies like an estate freeze, where a property’s value is locked in (triggering tax now on the frozen value) and future growth is transferred to the next generation (often via shares or trust units). This can be particularly useful for small business owners with real estate or large rental portfolios that they plan to pass on. In fact, the 2024 budget also proposed raising the Lifetime Capital Gains Exemption (LCGE) to $1### 2. Engage Tax and Estate Planning Professionals Early (continued)

In fact, the 2024 budget also proposed raising the Lifetime Capital Gains Exemption (LCGE) to $1.25 million for small business shares and farm/fishing properties, and introduced a special Canadian Entrepreneurs’ Incentive to tax certain business gains at only 33% inclusion. While those don’t directly apply to most real estate, they show the evolving landscape of tax relief measures. A professional can ensure you’re taking advantage of any available exemptions or deferrals (for instance, intergenerational farm property transfers have special rollover rules). They can also coordinate multi-disciplinary advice, bringing together accountants, lawyers, and financial planners so that your estate plan, tax strategy, and legal documents all align.

If your situation is complex – say you have properties in multiple provinces or countries, or blended family issues – professional advice is even more critical. Cross-border inheritance (e.g., a U.S. vacation home) introduces foreign estate and gift tax considerations that need specialized guidance. No online article can substitute for personalized advice; consider this blog a starting point and motivation to schedule a planning session with experts.

3. Use Life Insurance and Other Tools to Cover Tax Liabilities

One common strategy to deal with the inevitable tax on inherited properties is purchasing a life insurance policy on the parent(s) to cover the estimated capital gains tax due at death. For example, suppose you estimate that the cottage will generate a $300,000 tax bill in the future – the parents or the adult children can buy a life insurance policy such that the death benefit will roughly equal that $300k. When the last parent passes, the insurance payout provides the cash needed to pay CRA, allowing the property to pass to the heirs without necessitating a sale. Many advisors recommend this as it converts an uncertain, perhaps burdensome future tax into a series of affordable insurance premiums (often a relatively small annual cost, especially if purchased when parents are younger and in good health). As SFL Wealth Management notes, “a life insurance policy covering future capital gains tax on the secondary residence might not be too expensive… and the children as heirs could even pay the premiums themselves”, treating it as a way to protect their inheritance. This can also cover taxes on other assets like RRSPs/RRIFs that will be taxed at death, preserving more of the estate.

Other tools include setting aside specific liquid investments in the estate earmarked for taxes, or arranging for the executor to have a line of credit to pay taxes while an orderly sale of property is conducted (to avoid fire-sale prices under time pressure). The key is acknowledging the tax liability and planning for how it will be paid – don’t leave it as an unpleasant surprise for your heirs or force them into knee-jerk asset sales.

4. Evaluate Your Real Estate Portfolio for Future Tax Liabilities

For those with multiple properties or significant real estate investments, it’s prudent to inventory your unrealized capital gains and periodically estimate the embedded tax if you were to sell or if you were to pass away. This is essentially doing a “what if I died today” calculation – looking at each property’s current market value minus your cost (adjusted cost base), then applying the inclusion rate (50% or 67% if above threshold) and an assumed marginal tax rate. This exercise helps highlight which assets carry the biggest tax exposure. You might decide to gradually divest some properties during your lifetime to spread out gains over multiple years (thus using the $250k threshold each year and possibly staying in lower tax brackets). Or identify one property to designate as principal residence (if eligible) to maximize exemption, while planning the sale of others in a tax-efficient way.

Also consider the future use of each property: If children are not interested in keeping the family cottage, for instance, it may make sense to sell it while the parents are alive (when the parents can make decisions in a clear-headed way and even help with the sales process) rather than leaving it to be dealt with by the estate under emotional distress. Conversely, if keeping a property in the family is a priority, then the planning focus shifts to funding the taxes and structuring ownership (maybe via a trust or co-ownership agreement among siblings) to facilitate that goal.

An often overlooked aspect is provincial probate fees and land transfer taxes. While not as large as capital gains tax, they can still be material – especially in provinces like Ontario or B.C. where probate fees run around 1.3–1.5% of estate value. Gifting property before death can save probate fees (since the asset won’t be in the estate), but remember it triggers immediate capital gains tax and can have other downsides. Again, it’s a balancing act that requires number-crunching and scenario planning.

5. Communicate and Document Your Plan

Finally, a “soft” but crucial part of planning: communicate your intentions with family and document your estate plan clearly (wills, trusts, etc.). If parents intend for one child to inherit a particular property, make sure that’s clearly laid out in the will, and ideally discuss it with the family in advance. If taxes or expenses will diminish the value of that inheritance, consider how to equalize or compensate if fairness among siblings is a concern. Sometimes, a parent will leave the cottage to the child who loves it most, and leave other assets of equal after-tax value to the other child – the will can even direct the estate to pay the tax from the residue so the inheriting child receives the property net of tax. These are sensitive conversations, but they head off misunderstandings and family conflict later. Remember, estate planning is not just about tax and legalese, but also about managing family relationships and expectations.

In summary, planning ahead is key. With proposals like the 2024 capital gains inclusion rate hike, the sooner families review their plans, the more options they have to mitigate any negative effects (or leverage any new opportunities, like the expanded LCGE for qualified assets). As a Canadian estate advisor puts it, “taxes can change… it is beneficial to provide executors of your will with the flexibility to fulfill your wishes in a way that is tax-efficient at the time of death”. This might mean including powers in the will to allow for tax planning maneuvers, or just keeping plans flexible. The worst positions are those where no planning was done – leaving heirs scrambling to react to a surprise tax bill and possibly losing value in the process.

Expert Insights and Commentary

Let’s bring in some expert voices on this matter. Canadian tax professionals and estate lawyers have been weighing in on the proposed changes:

Scotia Wealth Management (Enriched Thinking) highlights the emotional and financial complexity of keeping a family cottage in the family. They note that a good cottage succession plan addresses both the tax funding (often recommending life insurance) and the family dynamics (who will use it, who will pay for upkeep). The capital gains tax at death is a central part of that discussion, and higher inclusion rates simply raise the stakes.
Shayna Beeksma, Estate Lawyer, points out that if a property was a primary residence, “the estate does not pay capital gains tax when the property transfers”, but “if it was a secondary residence… it would be subject to capital gains tax when it transfers to the beneficiary. However, the estate would be responsible for paying that tax.”. This underscores that beneficiaries aren’t on the hook at transfer, but the estate pays – something beneficiaries should be aware of because it affects what (and if) they ultimately inherit the property free and clear.
KPMG Canada’s budget commentary (and other accounting firms like PwC, Grant Thornton) have advised clients to consider using the $250,000 annual capital gains allowance efficiently by spreading out sales or gains if possible. For example, an investor with multiple rental properties might sell them over a few years rather than all in one year, to make use of the lower inclusion on the first $250k each year. Creative use of capital gain reserves (a CRA mechanism allowing certain sales to be recognized over up to 5 years) can also help stage out a large gain if you sell a property and allow the buyer to pay in installments.
Lawyers experienced in cross-border estate planning remind Canadians that our system does not step-up the cost basis for heirs like the U.S. system does. In the U.S., heirs often get assets at a fair market value basis without capital gains tax due (but the estate might pay estate tax if very large). In Canada, we tax the gain at death, meaning our system pre-taxes inheritances via the income tax system. This fundamental difference means Canadians can’t avoid the issue – planning for the capital gains at death is essential, whereas Americans often worry more about estate tax limits. So Canadian families should basically assume “death and taxes” will indeed come together, and plan accordingly.
Financial Planners also note that investing in assets that produce capital gains (like real estate or stocks) is still generally tax-favorable in Canada compared to interest income, even at 67% inclusion – but the gap narrows. Some high-net-worth families were concerned that the inclusion rate hike could signal further hikes or a shift in how Canada taxes wealth. There had been speculation of inheritance taxes or new surtaxes, but the government instead chose this route (then hit pause). It’s a reminder that tax policy can evolve, and diversifying the types of assets and how you hold them (personally, corporately, via trusts, etc.) can provide flexibility to respond to changes.

Conclusion: Plan Proactively for a Smoother Inheritance

Canada’s proposed increase to the capital gains inclusion rate – effectively a capital gains tax hike on large gains – has put a spotlight on the importance of estate planning for real estate. Inherited properties, especially cottages, rental homes, and other secondary real estate, come with built-in tax liabilities that families must plan for. While a principal residence remains shielded by the exemption (and that’s not changing), the cottage or second house can trigger a tax bill that might shock unwary heirs. By understanding the rules and proactively planning, you can often avoid the worst outcomes (like forced sales or family disputes). Use the tools available: timing strategies, expert advice, insurance, trusts, and smart will planning to navigate these waters.

It’s also wise to keep an eye on the news. As of this writing, the 67% inclusion rate is deferred to 2026 and may be scrapped, but even if it dies, the exercise of reviewing your estate plan shouldn’t. If you’re a potential beneficiary, talk to your parents about their plans and suggest involving advisors if they haven’t already. If you’re a parent or grandparent with property, start the conversation with your accountant or lawyer about how best to pass it on. These can be tough conversations, but the earlier they happen, the better the chances of a tax-efficient and conflict-free transfer.

Remember: Canadian tax law offers no mercy for last-minute planning – once a person has passed, opportunities are limited. So, take action while you can. Whether the capital gains inclusion stays at 50% or goes to 67%, the principles of sound estate planning remain the same: minimize taxes, provide for liquidity, treat heirs fairly, and fulfill your wishes. As the old saying (adapted for our context) goes, “By failing to prepare, you are preparing to pay (tax).”

Call to Action: If you or your family could be affected by these capital gains tax changes, don’t wait. Consult a Canadian tax professional or estate planner to review your situation. Every family’s scenario is unique – from different provincial laws to varying property values – so professional guidance is invaluable. By planning ahead, you can ensure that your family’s real estate wealth is preserved and transferred according to your wishes, with minimal tax surprises. Reach out to an advisor today to secure your family’s financial future and peace of mind.