My kids are on the title of my home. When I pass away and they inherit it, do they have to pay capital gains tax if they sell it?

Short answer: possibly, but only on growth after you die — and your estate may owe tax first.

When you pass away, Canada's tax rules treat your home as sold. The sale price, for tax purposes, is its fair market value — what it would sell for on the open market at that time. This is called a deemed disposition — a rule that treats your home as if it was sold the day before you died, even though no actual sale took place. If the home has gone up in value since you bought it, your estate may owe capital gains tax on that gain. Given the increase in value you're describing, this is worth understanding carefully.

If the home has been your principal residence, it may be fully or partly exempt from capital gains. This is called the principal residence exemption — a tax rule that protects your main home from capital gains. It applies to most family homes, and it can wipe out or reduce the tax your estate owes.

Once your children inherit the home, the Canada Revenue Agency sets their cost base to the home's fair market value at the time of your death. The cost base is the starting point used to work out any future gain. This means:

• If your children sell right away, there's likely little or no capital gains tax owing.

• If they sell later and the home has gone up in value since your death, they would pay capital gains tax on that increase.

Capital gains are not taxed in full — currently, only half the gain is added to their income and taxed at their personal rate.

One important flag: Because you added your children to title during your lifetime, there may be a separate tax issue to look into. When you added them, the CRA may treat that as though you sold them a share of the home at that time. If so, the home's increase in value up to that point may have been taxable for you — in the year you added your children to title. The principal residence exemption may reduce or wipe out that tax bill, depending on your situation. 

There's one more thing to note: this also affects your children's future tax picture. If the CRA treats the transfer as a deemed sale, your children’s starting point for calculating any future gain is the home's value when they were added to title — which may be lower than its value when you die. If the home has continued to rise in value, this could mean a larger capital gains bill for them if they sell. 

As you can see, there’s a lot to consider here — which makes it well worth seeking advice from a tax accountant or estate planning lawyer.