When Family Meets Inheritance: The Hidden Taxes Behind Estate Transfers

When Family Meets Inheritance: The Hidden Taxes Behind Estate Transfers

I recently sat with a family in Richmond Hill going through one of the hardest experiences I've seen in this business. Their parents had passed away, leaving behind a few homes and some savings, the kind of legacy built over decades of effort and careful living. What should have been a time to honour their parents turned into months of tension. Siblings who used to share dinners and laughter could barely speak to each other. It was a painful reminder that even the strongest families can struggle when love meets money without a plan.

No one ever intends for it to happen. But when a will is unclear, or property ownership isn't structured properly, emotions take over where clarity should have been. Everyone believes they're doing what's right, but without proper guidance, even small misunderstandings can grow into conflict. The saddest part is that all of this is preventable, with early planning, open conversations, and a basic understanding of how taxes and ownership work in Canada.

When someone passes away, the Canadian tax system automatically treats most of their assets as if they were sold that very day, what accountants call a deemed disposition. It's simply the government's way of calculating what's owed one last time before those assets move to the next generation. For the principal residence, there's good news: the gain is fully tax-free. But for rental properties, cottages, or other investments, the system assumes you sold them at today's market price, and half of that gain becomes taxable.

To put it in real numbers, if a rental bought for $600,000 is now worth $1,000,000, there's a $400,000 gain, and $200,000 of that counts as taxable income on the final return. RRSPs and RRIFs work differently but can be just as heavy: while they're tax-sheltered during life, when both spouses pass, whatever remains is treated as ordinary income that year. So, if there's $400,000 left in RRSPs, the estate might owe close to half of it in tax, because that income pushes the return into the top tax bracket.

All these taxes fall on the estate itself, meaning they must be paid before the heirs can receive their inheritance. The executor has to file the final tax return, settle the amount with CRA, and only after that can the assets be transferred to the children. If most of the wealth is tied up in real estate and there's little cash available, the family may have to sell a property or borrow against one to cover the tax bill. That's often when emotions rise, because even if no one's fault, it feels like part of the inheritance just disappears.

On top of that, there's Ontario estate administration tax, better known as probate, which is roughly 1.5% of the value of assets that pass through the estate. It's not huge by itself, but when combined with capital gains and income tax, it adds up quickly. None of these rules are unfair, they're simply how the system works. But when families don't understand them ahead of time, they can be blindsided by costs, delays, and tension that could easily have been avoided with a little planning.

One of the most common misunderstandings I see is around adding a child's name to the title of a property. Many parents do this thinking it will make things easier later. Sometimes it helps, but often it triggers a capital gain immediately, and if the property is a rental, it means rental income must be split and taxed between generations. There are also family law risks. If your child goes through a divorce, a jointly owned home can be treated as part of a matrimonial dispute. So before putting anyone on title, it's important to see the full picture.

Selling a property to a child for a symbolic $1 is another common idea that sounds simple but usually causes problems. The CRA looks at fair market value, not the price you wrote on paper. So the parent triggers capital gains tax as if they sold at full market value, and if the cost base isn't documented correctly, the child can face a huge tax hit when they sell later. Unless the child is moving in as their own home, this path rarely makes sense.

For most families, the cleanest approach is often the simplest: keep the properties in your name, maintain control, and pass them through the will. Your heirs inherit the properties at fair market value on the day of your passing, which resets their cost base for future sales. There will still be tax on your gains and probate on what passes through the estate, but it's transparent, and everyone understands the process. That clarity alone can keep families together.

Trusts can also play a helpful role for some families, especially when you want to protect assets, control timing, or provide income to one person while keeping ownership for another. A properly drafted trust can help bypass probate for specific assets and offer protection from creditors or marital disputes. It's not about avoiding tax; it's about managing relationships and keeping your intentions intact long after you're gone.

If you've built a portfolio of multiple rental homes, a holding company might make sense. It allows you to separate personal and business liability, make internal share transfers, and potentially simplify succession. It doesn't eliminate tax, but it gives you flexibility and structure, two things that make life much easier for the next generation.

Whatever your situation, the key is to plan early and keep everything updated. Make sure your will is current. Review who's on title and who the beneficiaries are on each account. Draw down large RRSPs gradually rather than leaving them to trigger one big tax bill later. Keep your TFSA full, it's tax-free growth and passes smoothly to your named beneficiary. If your estate may owe significant tax, consider life insurance as a funding tool so your family doesn't have to sell property in a hurry just to pay the CRA.

More than once, I've seen or heard families torn apart not because they were greedy, but because no one took the time to make things clear while they still could. A little preparation, a few conversations, and some good advice from your accountant and lawyer can protect both your wealth and your relationships.

When you look at your own situation, think of it this way: you've worked hard to build a life in Richmond Hill, to buy these homes, and to give your children stability. Passing that on shouldn't come with confusion or regret. The best gift you can leave isn't just the property, it's the peace that comes from knowing everything has already been thought through.



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