An inheritance is money or property that you leave a beneficiary in your will, often a family member or close friend. There are a few things to keep in mind if you receive an inheritance, or if you’re planning to leave one. Please note this information is meant to provide a general overview. For more specific advice, consult with a reputable tax advisor.
Taxes payable by the estate
When someone dies, their estate still pays income tax. For example, it may be required that any existing investments or savings be withdrawn and taxed as income on the final tax return.
For your investments, it’s important to name a beneficiary when possible. Naming a beneficiary may avoid probate and several associated fees, and this may permit the value of the investment to be transferred directly to the beneficiary.
Using segregated funds as an example, when a death occurs, the fund is sold and the beneficiary is paid the value. In this case, the estate may be required to pay tax for capital gains. Registered funds, RRSPs, and RIFs also have an option to name beneficiary. For more details, contact your personal tax advisor.
If the estate executor is a family member and not a lawyer, it’s a good idea to hire an accountant to prepare the final tax return to be certain the taxes are filed correctly before any funds are handed over to beneficiaries.
Taxes payable by you
The Canadian government repealed inheritance taxes in 1972, but you may still want to check with your accountant if the inheritance contains property or anything valuable besides cash. Capital gains from properties may not be exempt from tax; as a result, most estates sell properties so that their values can be passed on as cash.
Leaving a property to your family
Leaving a property in a will can be problematic because whoever is receiving the property may have to pay capital gains on the fair market value of the property. However, if it’s sentimental and high in value, like a family cottage, beneficiaries may be willing to split the capital gains charges to keep the property in the family. Discuss this with your family when drawing up your will.
Charitable donations and leaving a legacy
Donating some of your money to a charity may give you tax advantages on your final tax return. Learn more about using life insurance to leave a legacy to charity.
Life insurance and inheritance
In addition to helping you leave a legacy to charity, using life insurance as a component of your estate planning may help offset estate taxes on property and final income taxes on your estate.
Talk to your Financial Advisor if you have questions about inheritance, life insurance and taking care of your loved ones.