Inheriting a House in Canada: Taxes, Probate, and the Sell-vs-Keep Decision

An inherited house arrives at the worst emotional moment with the most paperwork attached. No inheritance tax exists in Canada — but “tax-free inheritance” is only half the sentence. Here’s the other half, and the decision framework once title is yours.

The tax that does exist: the estate’s final return

When someone dies, CRA deems them to have sold everything at fair market value the day before death:

• Principal residence: exempt — the principal residence exemption covers the gain
• Rental property, cottage, investments: capital gains on lifetime appreciation, 50% taxable, on the final return — plus CCA recapture on rentals (the landlord tax rules apply right to the end)
• RRSP/RRIF: fully taxable as income unless rolling to a spouse

The estate pays this from estate assets — occasionally forcing a sale of the very house being inherited. Then probate (up to ~1.5% in Ontario) before title moves. Your inheritance begins at the date-of-death fair market value — your cost base. Growth before that day was the estate’s problem; growth after is yours.

Your three options once title transfers

1. Sell it (the clean default). Your cost base ≈ current value, so capital gains on a quick sale are near zero. Pay off any mortgage, split proceeds per the will, done. The land transfer tax calculator isn’t needed — no LTT on inheritance — but legal and realtor fees apply.

2. Move in. Future growth can be sheltered by your own principal residence designation — but you get one designation per year per family: every year you assign to the inherited home is a year your current home’s gains go unprotected. Run both properties’ gain-per-year before designating.

3. Rent it out. Now you’re a landlord: net rental income at your marginal rate, all future appreciation taxable, CCA decisions with recapture consequences. Worth it when the rental math genuinely beats a sale — the rent vs buy framework works in reverse here.

The complications nobody warns you about

• A surviving mortgage must be paid by the estate or assumed by an heir who qualifies under the stress test — grief plus a mortgage renewal is a bad month
• Multiple heirs, one house: the classic deadlock. One sibling wants to keep it, two want cash — the keeper must finance the buyout (a spousal-buyout-style refinance logic applies)
• Contents, insurance, utilities from day one — insurers often restrict coverage on a home left vacant for more than about 30 to 60 days, so tell the insurer and arrange vacancy coverage if needed
• Intestacy: no will means provincial law decides heirs — spouses don’t automatically get everything everywhere

The 30-day checklist for the executor

Death certificates (order 10+) → locate the will → probate application → secure and insure the property → notify the mortgage lender → final tax return → CRA clearance certificate → then distribute or transfer. Skipping the clearance certificate to distribute early makes the executor personally liable for unpaid tax — the single most expensive shortcut in estate administration.

If you’re on the planning side rather than the inheriting side: a will, named beneficiaries, and a current net worth statement turn your family’s worst year into a paperwork exercise instead of a legal one. That’s the entire point of thinking about debt and death while it still feels morbid instead of urgent.