Accordingly, capital gains tax may not be applicable at the time of transfer. While the property may legally be jointly owned by the two of you, the property may still have been in your mother’s possession until her death.

What you need to know about the primary residence exemption

Every Canadian is entitled to one primary residence that grows in value tax-free. Before 1982, a couple could have more than one primary residence. Spouses can therefore each have had a principal residence.

Your mother owned two properties, meaning one of them grew in value on a tax-deferred basis. Upon your mother’s death, she would be deemed to have sold the two properties and one sale would be taxable whether or not she owns the properties with you. At that point, capital gains tax would have to be paid.

When did the capital gains tax come into effect?

The capital gains tax did not exist in Canada before 1972. There was also a capital gains election that your mother made possible if she owned her real estate before 1994. In 1994, a one-time election was available to make a capital return. gains up to $100,000 tax-free and increases the cost base for a taxable property such as a cottage.

Capital gains and primary residence

Sorry to report that your accountant is right, Kim. Capital gains tax is due on one of your mother’s properties. You decide what property you consider her primary residence, and you may be able to designate a property as her primary residence for one period and a property for another period.

In other words, if she owned her apartment for 20 years and her cottage for 10 years, you could consider her apartment her primary residence for the first 10 years and her cottage for the second 10 years, especially if the cottage was worth more and /or increased in value.

In this example, half of the apartment’s capital gain would be taxable and the cottage’s capital gain would be tax-free. In this way you minimize the capital gains tax to be paid with retroactive effect.

Another important point is that if your mother didn’t pay any capital gains tax when she donated the properties to you, which I assume not, the properties may technically be subject to probate and the resulting costs of probate fees.

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