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How Inheritance works

An inheritance is money or property that you leave to a beneficiary – often a family member, close friend, business partner, religious organization or charity – by way of your will. And, whether you’re planning to leave an inheritance or set to receive one, it’s good to keep the same important points in mind.

Note: The following information is meant to provide a general overview. For more specific advice, you should consult with professional financial, tax, legal and estate advisors. Your Co-operators financial representative is always here to help, too.

Named beneficiaries

When someone dies, their estate is subject to probate, which is the legal validation of a will – or of a court-decided distribution plan for the estate, in the absence of a will. The importance of having a will, of course, can’t be overstated. In some provinces, probate or estate-administration fees can be as much as 1.5% of the total estate value.

It’s equally important to name a beneficiary for any investments, whenever possible. This allows the value of the investments to be transferred directly to the beneficiary, known as “bypassing probate.” And, by avoiding the potentially hefty fees, it frees the beneficiary from a potentially lengthy and complicated process around accessing the funds.

Most registered accounts, such as TFSAs, RRSPs and RIFs, include an option to name a beneficiary. When death occurs, the investments within these accounts are then sold and the beneficiary is paid the market value. If the beneficiary is a spouse or common law partner, they also have the option to keep the investments and have them transferred to their name.

Taxes payable by the estate

A final tax return must always be filed by the named executor for the estate of the deceased. This accounts for any income earned between the person’s last filing and their date of death. Any taxes owed are paid out first from the estate assets, while any remaining funds are transferred to the beneficiaries named in the will.

As a priority, an estate has to pay outstanding income tax on things like Registered Retirement Income Fund (RRIF) balances, investment gains, and employment or other income. Meanwhile, estate assets, such as investments (registered and non-registered), businesses and real estate, are considered to have been sold for fair market value at the time of death. How they are taxed will vary by asset type.

Growth within a TFSA, for instance, is not taxed. However, the entire balance of an RSP or RRIF will be taxed. The estate would also pay tax on any investment gains within non-registered accounts. Taxation will depend on the type of account, the type of named beneficiary, as well as the income bracket the deceased is in during the year of their passing.

It’s generally a good idea to hire an accountant to prepare the final tax return. This will ensure that all available exemptions are applied, and that taxes are filed correctly – before any funds are distributed to beneficiaries. Once the estate taxes have been paid, the executor should make sure they apply for and receive a “clearance certificate” from the Canada Revenue Agency to confirm that there are no further taxes owing. Without the certificate, the executor could be held responsible for further taxes owed to the CRA.

Taxes payable by beneficiaries

In 1972, the Canadian government repealed inheritance taxes. Capital gains from transferred properties, however, may not be exempt; the one exception is for a person’s primary residence. As a result, estates often sell properties so that their values can be passed on as cash.

Another consideration is that leaving a property in a will may not be sufficient in meeting your estate objectives. If the beneficiary of the property wants to keep it, they need to pay tax on capital gains relating to the fair market value of the property. In short, if the estate doesn’t hold enough funds to cover the taxes, the burden falls to the beneficiary.

But, in the case of a sentimental and high-value property, like a family cottage, beneficiaries may be willing to split the capital-gains charges to keep it in the family. It pays to discuss various scenarios with your family, when drawing up your will.

Life insurance and inheritance

As a healthy component of estate planning, life insurance may help to offset taxes on property as well as final income taxes on your overall estate.

By purchasing life insurance, you’ll gain peace of mind, knowing that your assets won’t be liquidated to pay estate fees, and that your beneficiaries will receive their inheritance as you intended. Insurance can also ensure “bequest equalization.” This means that if one beneficiary receives the family cottage and there’s no liquidity left to provide a similarly valued inheritance to a second beneficiary, life insurance can fund the difference.

Charitable donations and leaving a legacy

Don’t forget that donating a portion of your money to a charity may provide tax advantages on your final tax return. It’s a great way to leave your estate in good financial standing and your legacy in good esteem! Learn more about using life insurance to leave a legacy.

Do you have questions about inheritance, investments, life insurance or leaving a legacy? Connect with your Co-operators financial representative* at any time.

*In the province of Quebec, the authorized representatives are Financial Security Advisors who have been duly certified by the Autorité des marchés financiers. Mutual funds are offered through Co-operators Financial Investment Services Inc. to Canadian residents except those in Quebec and the territories. Segregated funds and annuities are administered by Co-operators Life Insurance Company. Co-operators Life Insurance Company and Co-operators Financial Investment Services Inc. are committed to protecting the privacy, confidentiality, accuracy and security of the personal information that we collect, use, retain and disclose in the course of conducting our business. Visit for more information. Co-operators® is a registered trademark of The Co-operators Group Limited.