Thornby

Hiya everyone.

I'm one of several family members who have received a house in the U.K. as an inheritance gift. i.e. my portion is one-sixth of the house. Due to the poor housing market now, we are planning to lease it for a year or two.

I'm a Canadian citizen now, living in Vancouver, and I'm wondering how to handle the small amount of income likely to come in each month. I believe I'm supposed to declare rental income on my yearly tax return. Is that right, and do I also have to declare house expenses, such as mortgage and inheritance tax? Is it better to receive one lump sum at the end of the year, or trickling in each month?

Any advice gratefully received.

Thanks

iaink

Your bigger problem is that although you dont pay inheretance tax in Canada, you are liable for tax on your share of the capital gains on the house between inheriting it and liquidising the asset.

Given the current UK market and the likelyhood of it increasing in value between now and it being sold I would seek PROFESSIONAL advice on minimising your tax exposure on this one.

Aviator

You only file a tax return once a year, so if it is paid out as a single payment or monthly makes no difference. You should however declare this income. If your share is worth more than $100,000, then you have to put this on your return as well.

Inheritance tax cannot be deducted from anything as this is paid out by the estate prior to the distribution, it is not an expense of the recipient.
Proportional expenses can be deducted from income, such as maintenance, mortgage (interest portion only) etc.

It would also be worthwhile getting a formal valuation of the property at the point of you taking ownership, when it is sold any profit between acquisition and sale price will be subject to capital gains tax as it is not your primary residence.

Thornby

Thanks for your advice. Sounds like a minefield and that we'll need a trip to some tax accountants.

Re: capital gains tax. The house was valued at time of death (June 2008) when the market was high. If it sells for less than that some time in 2010, does that mean I don't have to pay capital gains tax?

Also, the house is only being rented from next month, so I haven't received any income or money yet. Does that mean i don't have to declare anything yet on Canadian 2008 tax forms?

JAJ

Possibly, but you may have to convert the two amounts into Canadian dollars and see the tax on the difference.

I'm not sure if renting the property is all that good an idea ... what happens if in June 2010 some owners want to sell and the others don't? Or if there is a difference of opinion over major repairs?

If it's 2009 income, it doesn't have to be declared on 2008 tax returns!

Novocastrian

^^^ what he said (only better).

JonboyE

The value at date of death is irrelevant for Canadian tax. What counts is the value when you get legal ownership of your share. This is your "tax cost" for your share of the property. I agree it is a good idea to get a valuation at that date. There is no tax to pay in Canada at this point.

You have to pay tax of your share of rental income less expenses. If it has been a rental property and when it sells your share of the proceeds is less than your tax cost you will have a capital loss. It it wasn't a rental property you will not have a capital loss but there would be no tax to pay in Canada on the sale proceeds. If your proceeds from the sale are greater than you tax cost you will have to pay tax on the capital gain, regardless of whether the property had been rented or not.

As JAJ (and I guess Novo) says, there is nothing to report on your 2008 tax return unless you already have legal ownership of your share of the property AND your share is worth more than $100,000.

Aviator

You would be well advised to seek professional advice. If the house sells for less than it is valued when you got it then you can claim a capital loss and that goes against income.

The value of the house is taken at the time you take ownership i.e. when the deed is transferred to you, not at the time of death. As a Canadian resident you can get the CDN$ equivalent from CRA, which they get from the BoC. You cannot put your own exchange valuation on it or take your banks rate.

If you are in a joint ownership, you may want to consider a joint ownership agreement (in writing, drawn up by a lawyer) laying out the terms of disposal, maintenance etc and how these are to be carried out, how one party can get out if the others don't want to sell and if the others wish to buy your share the terms on how a valuation is reached. Treat it like a business, as in effect that is what it is.

Thornby

Thanks, everyone, really appreciate it.

I talked to a friend who pointed out that at this stage, the executor is legally in charge of the house, so for capital gains tax purposes in Canada, I don't own my portion yet. Does that sound right?

iaink

No, but as I said, seek a professional opinion.

JonboyE

The deceased's estate creates a testamentary trust that is resident in the UK. Taxation of the trust's assets and income is a matter for HMRC, not the CRA.

Aviator

Yes, the house in probate until title deed is transferred to you. At the point you take ownership god idea to get a valuation.

Get professional representation to be sure.

Piff Poff

Can I jump in and ask a inheritance question please???

My hubby inherited a sum of money last year - I assume we have to declare it on our tax forms this year, it's just in the bank at the mo' as we're not sure what we want to do with it - are we going to get hammerd with taxes???

iaink

Nope, inherited gifts are not included as taxable income. Income earned on it is taxable though.

Aviator

There is no inheritance tax in Canada. If the amount is over $100,000 this needs to be declared on his tax return if the funds are still overseas. If it is in a foreign currency and the exchange rate improves between him receiving the funds and exchanging it to CDN$ there could be a currency gain (or loss if the rate drops) that is taxable. Also any earnings on the money after receiving it is part of taxable income.

http://www.mnp.ca/04library/EstatePlanning.php