My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 4, 2021

The Implications of Receiving an Inheritance

There is a large wealth transfer occurring in Canada, with estimates as high as $750 billion dollars.

While I have written on issues and concepts related to inheritances (with a bit of a caustic tone, based on my actual experiences), I have written very little on receiving an inheritance. Thus, today, I will discuss the income tax implications of receiving an inheritance and some of the issues to consider upon receiving an inheritance.

If you are interested, the posts I referenced in the prior paragraph are:"Is it Morbid or Realistic to Plan for an Inheritance?", and “Taking it to the Grave or Leaving it all to your Kids?” and “Inheriting Money – Are you a Loving Child, a Waiter or a Hoverer”.

The Income Tax Implications of Receiving an Inheritance

In Canada, there are generally no direct income tax consequences to receiving an inheritance. I say generally because there are a couple very rare circumstances where you could pay tax. The first is where you are the beneficiary of a deceased’s RRSP/RRIF and the estate does not have enough money to pay the estate taxes. Surprisingly to most people, the CRA has the right to go after the beneficiary of a RRSP as the CRA considers the beneficiary jointly liable with the estate. The second rare situation is where a will makes a beneficiary liable for taxes arising on the transfer of assets from the deceased. However, both these exceptions are highly unusual and in almost all situations, there are no taxes due upon the receipt of an inheritance.

So, to be clear. If your inheritance is in cash, you receive those funds tax-free. If your inheritance is a capital property of some kind such as stocks or real estate, you again receive the capital property tax free.

However, in the case of capital property, you generally inherit the cost base of the property to the deceased, which is typically equal to the deemed proceeds of disposition for the deceased. Usually, this amount is the fair market value ("FMV") of the property right before the person's death.

So for example, if your mother passes away as the last surviving spouse (it is likely when your father passed away he left his estate to your mother – which is typically a tax-free spousal transfer at his passing) and she owned 100 shares of Bell Canada that originally cost $25 a share, but were worth $65 a share at her passing; her estate would file a final (terminal) income tax return reporting a deemed capital gain of $4,000 (FMV at death of $6,500-$2,500 original cost). This deemed capital gain is known as a deemed disposition on death and occurs despite the fact the Bell Canada shares were not sold, because your mother was the last surviving spouse. Your mother’s deemed disposition FMV of $6,500 becomes your new cost base of the inherited shares. So, if you sell the Bell Canada shares in the future, the gain would be equal to your sales proceeds less $6,500.

If you wish to learn more about how your estate is taxed on death if you are the last surviving spouse, see this blog post I wrote a few years ago, The Two Certainties in Life: Death and Taxes - Impact on Your Personal Income Tax Return

Dealing With an Inheritance

Receiving a large inheritance can be overwhelming, especially if you are not financially sophisticated. I wrote a detailed blog on this topic in 2011 if you wish to read it Dealing with Financial Windfalls & how to stave off the Money Leeches

However, today I will give you the Coles notes version.

Practically, it is almost impossible for a large inheritance to go unnoticed. A family member or friend will advise someone of the passing of your parent /sibling/relative etc. and somehow someway it is likely an investment person will be amongst those to find out and you will get a call. If you avoid the above, a large deposit at the bank will likely trigger someone at the bank to speak to you. It is almost unavoidable.

If you already have an investment advisor/manager you work with and trust, selecting an advisor is a non-issue. But if you have not really worked with an investment advisor/manager or their practice is built around smaller net worth clients and your inheritance is substantial, you will want to review your situation. The best advice is often to “park” the money in a GIC for a couple months until you have regained both your emotional and financial equilibrium and have had time to speak to family and friends to get a couple good referrals and absorb your new situation.

The “parking” of the inheritance would also apply to any decision to give money away (as you may receive subtle or less than subtle hints about gifting part of your inheritance to various family members) as well as holding off investing part of your inheritance.

Putting the money in a GIC or similar investment also provides you a built-in excuse to not be able to make any decisions in the near-term, since if anyone has the audacity to ask, you answer, “my money is locked in for 3 or 6 months and I cannot touch it”.

Inheritances typically come on the heels of emotional distress and in many cases, significant changes in your financial situation. The good news is that in almost all circumstances the cash or capital property inherited is tax-paid money and you have no additional tax concerns. However, the “new-found” wealth can be stressful from both an investing and gifting perspective and you need to ensure you have a clear mind before making any decisions on both fronts.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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