A lovely couple in their 70s recently came to us for Will and estate planning services. They had been permanent residents of Canada about 20 years ago but later relinquished their status when they could no longer meet the residency requirements. Today, they are non-residents for tax purposes.
Two decades ago, they purchased a rental property in BC for $300,000. That same property is now worth approximately $1,800,000. They hold title as joint tenants, which generally means that when one owner passes away, the surviving owner automatically becomes the sole owner of the property through the right of survivorship.
However, they were unaware of a critical exception. The usual property transfer tax exemption on a transfer between joint tenants at death is not available to foreign nationals. Under the Property Transfer Tax Act, the definition of a “foreign national” is taken from the Immigration and Refugee Protection Act. This means a person who is not a Canadian citizen or a permanent resident.
For our clients, this meant that if one of them were to pass away, half of the property’s value (around $900,000) would be subject to the 20% Additional Property Transfer Tax, which is commonly known as the “foreign buyer tax.” That would result in an extra $180,000 payable to the province simply because they are no longer permanent residents.
This revelation was shocking enough. The situation was made worse by the fact that they are sitting on a substantial unrealized capital gain. Generally, the spousal rollover provision that allows property to transfer to a spouse at death without triggering immediate capital gains tax is not available for non-residents.
Given the significant potential tax burden, we immediately urged our clients to obtain detailed tax advice from a qualified accountant. We then worked closely with their accountant to develop a strategy that would:
- Avoid triggering the Additional Property Transfer Tax
- Minimize the income tax payable on the capital gain
- Ensure their estate plan still reflected their testamentary wishes
This case is a strong reminder that tax residency status and property ownership structure can have profound and costly implications in estate planning, especially for non-residents.