What to do with an inheritance

Experts offer clear-sighted advice on the dos and don'ts of an inheritance.

By Jennifer Power Scott

How much belongs to the tax man?
Death and taxes
Unfortunately, the tax man doesn't forget us when we die. Before an inheritance can be doled out, the Canada Revenue Agency(CRA) has to get a cut. Depending partly on how rich the deceased person was, up to half of the estate can go to taxes.

On top of that, rifling through reams of paper and refereeing family squabbles can be a massive job for the executor. In the end, many beneficiaries wind up having a long time to contemplate how to spend the windfall. "I've seen estates settle everything in three months from the date of death," says Black Hughes. "And I've seen it go for seven years."

How to handle taxes
A year after their father passed away, Ann and her three siblings are still grappling with tax issues. "We are paying a huge amount to the tax man," says Ann. When someone dies and leaves everything to a spouse, there's usually no tax hassle: RRSPs, registered retirement income funds (RRIF), real estate and other investments can simply roll over to the husband or wife.

"The transfer is done through what CRA calls a refund of premiums," explains Foster. "The amount of the deceased's RRSP is included in the beneficiary's income and offset by an RRSP tax receipt for the same amount. This effectively rolls over the deceased's RRSP to the surviving spouse without affecting the spouse's own RRSP contribution limit."

The tax situation gets more complicated when the surviving spouse dies – or if the deceased was single or divorced. Under the federal Income Tax Act, the person is deemed to have disposed of company shares, real estate or any other capital property at fair market value. "Basically this just means that the government pretends you sold all of your property the second before death," explains James Rhodes, a tax lawyer with the Miller Thomson firm in Kitchener-Waterloo, Ont. "The estate hasn't sold anything. It just has to pay tax now on things it’s still holding in its hands."

A final tax
The executor of the will files a final tax return for the deceased. In it, RRSPs and RRIFs must be reported as if they have been cashed in. Assets that have capital gains – or an increase in value from the time they were purchased – must also be reported. (One bonus: The deceased person's principal residence is exempt from capital gains tax. Additional residences, such as a cottage, are not.)

In the end, an estate can be stuck with a hefty tax bill, one that can eat into what the beneficiaries will receive. "The beneficiaries don't pay the tax," explains Rhodes. "They simply get less of a gift, provided there is enough cash cashable investments or insurance paid to the estate."

Once the executor settles the estate, CRA issues a clearance certificate to confirm all income taxes have been paid. By the time you get your inheritance cheque, you shouldn't have to worry about the taxes. "It's a bit like winning the lottery," explains Foster. "The taxes should have been paid by the estate. So the money, when you receive it, is yours."


Page 3 of 4 – Find out special circumstances that would require more consideration on page 4.


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