So....election in 2024!?

[mimico_polak]

FYI @mimico_polak , his estate will pay the capital gains portion of the cottage.

I always wondered how does that work…

Let’s say I get cottage (500k value), and sis gets family home (1M) value…

How does the estate pay that capital gain?

Where’s that money come from exactly if the bank account is empty?

Everyone always says ‘the estate will pay that’…but how?

 

[GreyGhost]

Haven't watched it yet

It's an ok discussion. Not much in there that should be surprising. They missed an opportunity to flesh out how many people get affected by this. As journalists, coming up with the number of canadians with at least two properties and/or a corporation shouldn't be too hard and it would be valuable information to combat liberal lies.

 

[GreyGhost]

I always wondered how does that work…

Let’s say I get cottage (500k value), and sis gets family home (1M) value…

How does the estate pay that capital gain?

Where’s that money come from exactly if the bank account is empty?

Everyone always says ‘the estate will pay that’…but how?

My FIL has a life insurance policy to cover the CG on the cottage (if they still own the cottage when he passes away).

If they don't have insurance and don't have any cash or cash equivalents, then you and your sister need to work it out. I'm not sure of the detailed mechanics (estate can't get a loan afaik) but essentially she'd pull a loan to pay the CG tax on the cottage. If CG tax was 100k, that would give her a 900k inheritance and you a 500k inheritance. Ideally in a cashless estate, she'd pull enough loan (or sell the house) to even things out. If she gets a 300k loan her inheritance is 700K and you get the 500k cottage (tax paid by your sister) and 200k cash so you get a 700k inheritance as well.

 

[backmarkerducati]

Lots of family fall-outs happen over the will and the who gets what... like my crazy $700 example...

The best approach IMO is sell the assets, pay the taxes via the estate and split what is left equally. If someone wants a specific big ticket item (house, cottage, classic car, Picasso...) they can buy it from the estate at market value or take the value out of their share. Small trinkets can be split however. In the end, the will is made today, in the example cottage is worth 500K, house 1M. What if they pass 15 years from now, guarantee it will not be the same one way or another, values change, maybe one got leveraged to pay for long term care, who knows?

 

[GreyGhost]

Lots of family fall-outs happen over the will and the who gets what... like my crazy $700 example...

The best approach IMO is sell the assets, pay the taxes via the estate and split what is left equally. If someone wants a specific big ticket item (house, cottage, classic car, Picasso...) they can buy it from the estate at market value or take the value out of their share. Small trinkets can be split however. In the end, the will is made today, in the example cottage is worth 500K, house 1M. What if they pass 15 years from now, guarantee it will not be the same one way or another, values change, maybe one got leveraged to pay for long term care, who knows?

That's our theoretical plan with my wifes family. Her brother wants the cottage. Everything else (assuming there is anything else) will get liquidated. Depending on where the numbers lie, he could be pulling a loan to keep the cottage. Realistically, I think the in-laws will sell the cottage before that point. It is a lot of money and work and my BIL wants all the fun and none of the responsibility.

 

[backmarkerducati]

That's our theoretical plan with my wifes family. Her brother wants the cottage. Everything else (assuming there is anything else) will get liquidated. Depending on where the numbers lie, he could be pulling a loan to keep the cottage. Realistically, I think the in-laws will sell the cottage before that point. It is a lot of money and work and my BIL wants all the fun and none of the responsibility.

Well he could always buy it now from them, as long as it is market value that money goes into their wealth and maybe they get some back when it is time... Where things can also go sideways, if the purchase is some sort of sweetheart deal... well you got this and now I only get that. No perfect plan.

 

[GreyGhost]

Well he could always buy it now from them, as long as it is market value that money goes into their wealth and maybe they get some back when it is time... Where things can also go sideways, if the purchase is some sort of sweetheart deal... well you got this and now I only get that. No perfect plan.

He wants none of the responsibility. No time invested. No money invested. No paying for expenses. Just fun. The inlaws told him he may have to S^&# or get off the pot shortly or the decision will get made for him. His wife is ****** and refuses to acknowledge that the path she wants is likely not available to them.

 

[Mad Mike]

I always wondered how does that work…

Let’s say I get cottage (500k value), and sis gets family home (1M) value…

How does the estate pay that capital gain?

Where’s that money come from exactly if the bank account is empty?

Everyone always says ‘the estate will pay that’…but how?

Once inheritance is triggered, the estate pays all the taxes and outstanding debts before distributing assets - just because you inherit the cottage doesn't mean you inherit the estate's tax debt. Funds from the estate are used to pay the CG on your cottage, any income taxes due (including those on cashout of RRSPs), and debts a before the assets are distributed.

There should be no CG on the house (principal residence), investments and the cottage will have some CG, and unused RRSPs will have income taxes due.

Scenario 1:
The estate looks like this:
$250K in cash/stocks/rrsps/insurance,
$500K cottage and;
$1M house.
----------------------
1.75M

Let's also say there are tax liabilities:
$100K in CG on the cottage
$50K Inccome and or CG tax on the cash out of stocks, RRSPs etc.
Total tax liability: $150K.

The estate uses the cash to pay the tax debt, you get the cottage, sis gets the house. and the remaining cash is divvied up according to the terms in the will. Done.

Scenario 2:
The estate looks like this:
$0K in cash/stocks/rrsps/insurance,
$500K cottage and;
$1M house.
----------------------
$1.5M

Let's also say there are tax liabilities:
$100K in CG on the cottage
Total tax liability: $100K.

The estate needs cash to pay the tax debt -- no cash available. The tax debs dilute each inheritance on a pro rata basis, so in this simple scenario 66.6% of that debt would come from whoever inherits the house ($66,666), and 33.3% ($33,333) from whoever inherits the cottage. If either party cannot pay their part, the likely scenario is real estate they inherited will be sold and they get cash proceeds instead. So if you inherit the cottage, you'd have to come up with 1/3rd (or the prorated value) in cash to keep the place. If Sis couldn't raise the funds to pay the 66%, the house would be sold, and she gets her slice in cash, say $920K.

Clear as mud?

 

[mimico_polak]

Thanks @Mad Mike ... clear as mud indeed! Parents are going to the lawyer in a few weeks to figure things out. Right now it's all up in the air, but I'm glad they're taking the steps now.

It's a bit more complex (4 properties total), but for simplicity I used just the 2.

So in theory...it may be better to sell off each asset as the time comes, pay the CG from the gains, and distribute accordingly / fairly.

But I already told my parents 'you owe me nothing. It is your money, your property, and YOU decide what you want to do with it. Give it to us, sell it, burn it, do whatever you feel is best'.

Me personally...I'd sell the assets and hand out cash gifts while I was alive so that I can actually see my kids benefit from it, and hopefully their life is better for it.

 

[mimico_polak]

Lots of family fall-outs happen over the will and the who gets what... like my crazy $700 example...

The best approach IMO is sell the assets, pay the taxes via the estate and split what is left equally. If someone wants a specific big ticket item (house, cottage, classic car, Picasso...) they can buy it from the estate at market value or take the value out of their share. Small trinkets can be split however. In the end, the will is made today, in the example cottage is worth 500K, house 1M. What if they pass 15 years from now, guarantee it will not be the same one way or another, values change, maybe one got leveraged to pay for long term care, who knows?

This is the cleanest, simplest, and most direct option...which is def under consideration.

In theory, the cottage will gain value and continue growing up with time (albeit slowly).

Spoke with a realtor in the area, friend of mine, and he basically said 475-500k is what can be expected from a sale. Assume a 4% commission, and that's 480k - CG = 350-380k (approx depending on math with new CG rules).

 

[Evoex]

Well good news for me it seems. I owe a total of $1,300 to CRA this year and that's after over $20k in declared income from instructing (who don't take tax off). I got a lot of relief thanks to my wife's contributions in the USA. Also have about $400k in capital loses to roll forward for future tax relief.

/praise be

 

[mimico_polak]

Well good news for me it seems. I owe a total of $1,300 to CRA this year and that's after over $20k in declared income from instructing (who don't take tax off). I got a lot of relief thanks to my wife's contributions in the USA. Also have about $400k in capital loses to roll forward for future tax relief.

/praise be

400k in capital losses!? None of my business but … not sure I’d be praising anything…

 

[Evoex]

400k in capital losses!? None of my business but … not sure I’d be praising anything…

house sold under appraised value, so it's CL for me instead of CG.

wasn't ideal but I wasn't the only person involved. sometimes it is what it is.

 

[AllistonGT]

Me personally...I'd sell the assets and hand out cash gifts while I was alive so that I can actually see my kids benefit from it, and hopefully their life is better for it.

I couldn't agree more.

 

[Mad Mike]

house sold under appraised value, so it's CL for me instead of CG.

wasn't ideal but I wasn't the only person involved. sometimes it is what it is.

Selling under appraised value doesn’t provide a capital loss.

Capital_loss = sell_price - adj_capital_cost

I suppose if you inherited a property then sold it at a later date you might have deemed the investment cost to be higher than the sell price. Be careful with that, deemed cost losses are a red rocket for CRA audits.

 

[mimico_polak]

house sold under appraised value, so it's CL for me instead of CG.

wasn't ideal but I wasn't the only person involved. sometimes it is what it is.

I’d be careful with that as @Mad Mike says. You effectively got a property for free with no acquisition cost…selling under appraised value is NOT a loss…

Just make sure you accountant doing magic fairy math doesn’t burn you later.

 

[Evoex]

Guess we shall see!

 

[mimico_polak]

Maybe I can find an appraiser to give us a value of 200k for the cottage…the bribe would cost me less then the capital gains.

 

[Green Meenie]

Thanks @Mad Mike ... clear as mud indeed! Parents are going to the lawyer in a few weeks to figure things out. Right now it's all up in the air, but I'm glad they're taking the steps now.

It's a bit more complex (4 properties total), but for simplicity I used just the 2.

So in theory...it may be better to sell off each asset as the time comes, pay the CG from the gains, and distribute accordingly / fairly.

But I already told my parents 'you owe me nothing. It is your money, your property, and YOU decide what you want to do with it. Give it to us, sell it, burn it, do whatever you feel is best'.

Me personally...I'd sell the assets and hand out cash gifts while I was alive so that I can actually see my kids benefit from it, and hopefully their life is better for it.

In that both parents are still alive now, I can almost guarantee you that as life happens going forward, things will change and any plans made today will need a rethink at some point.

Our family went through a similar process with my parents 25 years ago. We had it all figured out and everyone was happy with the plan!
Fast Forward to now; father's dead 22 years, 2 beneficiaries of their will also pushing up daisies. Mother had to go into full care almost 4 years ago now at 100 years of age for a whole host of reasons. Almost nothing they were dealing with or planning 25 years ago is in play now and there's stuff in play now that they didn't even think of then.

My point is, making a plan now IS a good thing but it isn't the end; merely the beginning. All involved must stay on top of things and remain felxible as time passes and life happens.

I'm sure you'll stay on top of things as you seem well invested in all this.

 

[GreyGhost]

Maybe I can find an appraiser to give us a value of 200k for the cottage…the bribe would cost me less then the capital gains.

As his washed through an estate. If the estate paid capital gains that were based on a value of X and evo sold house for X-400 you have a decent paper trail. I have no idea if that paper trail is sufficient to appease CRA.