With Canada’s massive baby boomer generation rapidly aging, the country is bracing for one of the largest inter-generational wealth transfers in history. As boomers pass on, billions in assets will flow through inheritance to younger generations.
While receiving an inheritance provides a valuable chance to upgrade your financial standing, the process has important legal, tax, and financial complexities you need to fully grasp. This extensive guide examines all key facets of reinheritances in Canada, equipping you to properly handle the responsibilities and maximize the benefits.
Current Inheritance Statistics in Canada
According to the BMO InvestorLine Study, the average expected inheritance in Canada is just under $100,000. However, expected inheritance amounts vary widely across the country based on regional affluence levels.
| Region | Average amount received |
| National | $96,378 |
| Atlantic provinces | $31,942 |
| Quebec | $105,963 |
| Ontario | $113,509 |
| Prairie provinces | $49,780 |
| Alberta | $62,395 |
| British Columbia | $120,340 |
More than half (55%) of Canadians have received an inheritance, and two-thirds (63%) believe they will receive one at some point in the future.
This survey also found that among Canadians who receive an inheritance:
- 91% plan to invest at least some of the funds
- 79% will use it to pay down debt
- 78% intend to spend it on travel or needed items
- 75% may help family/friends with major expenses
- 63% will donate a portion to charitable causes
It is expected that $1 trillion in personal wealth will be transferred from one generation to the next in Canada over the next two decades.
What Steps Are Involved in Receiving an Inheritance?
Receiving an inheritance involves a defined legal process with five important steps:
Being Named as a Beneficiary in a Will
The starting point is being named as a beneficiary in the deceased’s will. Common will beneficiaries are spouses, children, grandchildren, siblings, friends, partners, and charitable organizations. It’s absolutely critical for will-makers to proactively keep their will updated as their life circumstances and wishes change.
The Executor Has a Complex Job Settling the Estate
The executor (or estate trustee) has the crucial job of carrying out the terms of the will and settling the estate. Their duties include:
- Locating and submitting the will to the probate court for validation
- Creating a thorough inventory of all estate assets and liabilities
- Obtaining official date-of-death valuations on all assets
- Settling any outstanding debts and taxes
- Distributing the inheritance methodically to beneficiaries
- This entire estate settlement process typically takes several months or even years, depending on the assets, debts, and the estate’s complexity.
Probate Court Validates the Will
The executor must apply for probate – the court process that formally approves the will and gives the executor the authority to act.
To initiate probate, the executor files various legal papers like the original will, death certificate, and probate application. The probate court thoroughly assesses all documentation and officially appoints the executor under probate law. Each province charges probate fees based on the total value of assets.
| Province | Probate Fees |
|---|---|
| Ontario | 0.5% on value under $50,000, 1.5% on value above $50,000 |
| British Columbia | $200 admin fee + 0.6% on $25,000 – $50,000 value, 1.4% on value over $50,000 |
| Alberta | $35 to $525 depending on estate value |
| Quebec | $202 for non-notarial will, $0 for notarial will |
Mandatory Waiting Periods Must Pass
After probate is granted, most provinces require a waiting period before the executor can distribute assets. This allows time for legal challenges or creditor claims. For instance, British Columbia requires a 210-day waiting period unless all beneficiaries consent to an earlier distribution.
Finally, Receiving Your Inheritance
Once the waiting period expires and all estate obligations are met, the executor can distribute the inheritance. Beneficiaries will need to provide identification and sign a release form confirming receipt of their share.
What is the Taxation of Inheritances in Canada?
One of the most complex facets of receiving an inheritance is navigating the tax implications. While inheritances themselves aren’t taxable, estates do pay various taxes that lower the amount beneficiaries ultimately receive.
No Separate Inheritance Tax
Canada does not levy an inheritance tax or an estate tax. You do not pay income tax on the assets you receive directly. However, the deceased’s estate is subject to taxation itself before final inheritance distribution. What beneficiaries eventually receive is the after-tax estate value.
Capital Gains Taxes Apply
The Canada Revenue Agency (CRA) considers a person to have sold all their capital property immediately before death. This is referred to as a “deemed disposition” at Fair Market Value. If the property has increased in value, this triggers a capital gain, and 50% of that gain is taxable on the deceased’s final tax return.
Significant Exceptions for Spousal Inheritances
Assets can typically be transferred to a surviving spouse or common-law partner on a tax-deferred basis. This “spousal rollover” means the capital gains tax is not triggered upon the first spouse’s death. The surviving spouse acquires the property at its original cost, and the tax is deferred until they sell the asset or pass away. RRSPs and RRIFs also benefit from this rollover.
Reporting Foreign Inheritances to the CRA
Any inheritance received from another country must be reported to the Canadian tax authorities using Form T1142. Failing to properly disclose foreign inheritances can result in penalties. Additionally, any future income generated from foreign inherited assets is still taxable in Canada, even if the funds remain outside the country. This foreign investment income must also be declared annually.
Due to the complex interplay between inheritance and taxes in Canada, proactively obtaining professional advice from an accountant or tax lawyer is strongly recommended.
5 Smart Preparation Steps When Expecting an Inheritance
Since receiving a large inheritance can significantly impact your life, it’s prudent to make 5 advance preparations:
- Process emotionally: Don’t rush into major financial decisions before fully processing the grief and emotions that naturally come with losing a loved one. Give yourself ample time and space.
- Communicate with other beneficiaries: Openly discuss your intentions and also listen to other beneficiaries to minimize potential conflicts about inheritance distribution. Manage expectations early.
- Consult professionals early: Meet with financial, tax and legal professionals as soon as possible to understand your options and get strategic advice tailored to your inheritance situation.
- Make a written plan: Carefully consider your financial goals and map out a detailed written plan for how you intend to best utilize the inheritance if received. This will provide a roadmap.
- Learn about your liabilities: Research what potential liabilities you may take on (like debts or taxes) before accepting your inheritance, so there are no surprise obligations.
What are the Recommended Next Steps After Receiving an Inheritance?
Once the inheritance payment is deposited into your account, the actions you take next are pivotal in determining whether the windfall becomes a long-term blessing or a short-lived gain. The most common and costly pitfalls, such as indulging in impulsive splurges or rushing into investments without a clear strategy, can be avoided by embracing a disciplined and patient approach.
Before making any significant moves, you should pause and conduct a thorough review of your entire financial picture, including existing assets, debts, and income, to understand how this new capital fits into your life.
Rather than making any sudden moves, engage in ongoing consultations with your trusted financial, legal, and tax advisors. Their professional guidance is invaluable for developing a customized and strategic plan that aligns with your long-term goals and risk tolerance.
It is essential to resist the temptation to splurge on luxury items and instead remain disciplined by following your written plan. This allows you to invest the new capital strategically, preserving and prudently growing it for the future. If you like to give to charity, setting aside some money for causes you care about can be a rewarding part of the process.
Explore more insights on estate planning and the last will and testament
- What Happens If You Die Without A Will In Canada?
- What Happens To Bank Accounts After Death In Canada?
- Government Funeral Assistance in Canada
- DIY Will Kits and Templates in Canada
Summary
Receiving an inheritance can be a real game-changer in funding your future financial security and growth – if handled prudently. Seeking ongoing guidance from professionals, proactively planning ahead, maintaining investment discipline, avoiding common mistakes, and strategically thinking will enable you to maximize your inheritance for long-term benefit. With education and care around this financial windfall, your inheritance can become an accelerator on your journey to financial freedom and security.
Now that you understand the key considerations around receiving an inheritance in Canada, from the legal process to tax implications, you can move forward confidently to make the most of this financial windfall.
Frequently Asked Questions (FAQs)
What tax forms are required when receiving an inheritance in Canada?
When receiving an inheritance in Canada, the deceased's estate is responsible for filing tax forms and paying taxes owed. As a beneficiary, you do not need to report the inheritance as income. However, you may need to report capital gains if you later sell inherited assets.
Does receiving an inheritance affect government benefits in Canada?
Generally, receiving an inheritance does not reduce government benefits like CPP, OAS, or GIS benefits in Canada. However, it could potentially impact benefits if you do not spend the inheritance amount right away. The inheritance capital could be considered an asset.
Is receiving an inheritance considered a gift in Canada?
No, an inheritance is not considered a gift in Canada. An inheritance involves assets transferred from someone who has died, while gifts involve voluntarily transferred assets directly from the living person. Inheritances and gifts have different tax implications.
How does probate work when receiving an inheritance in Canada?
When receiving an inheritance in Canada, the will usually has to go through probate, where the court reviews the will, confirms the executor, and formally approves asset distribution. The executor initiates probate by filing documents like the will and death certificate.
What are the different ways of receiving an inheritance in Canada?
Common ways of receiving an inheritance in Canada include cash, registered accounts, real estate, securities, business shares, personal possessions, jewelry, art, and digital assets. How you inherit depends on the specific assets in the estate and distribution instructions.
Is inheritance received in Canada subject to capital gains tax?
In Canada, inheritance itself is not taxed, but capital gains tax may apply if inherited capital assets like property increase in value. This tax would be paid by the estate before you receive your inheritance.
How long after someone dies is the inheritance distributed when receiving an inheritance in Canada?
The timeline varies, but you typically receive your Canadian inheritance anywhere from 6 months to 2 years after the person dies. The executor needs to complete probate, pay debts, settle disputes, and finally distribute once approved by the probate court.
What are the important tax considerations when receiving an inheritance in Canada?
Key tax considerations are capital gains tax on assets, tax exceptions for spousal beneficiaries, proper reporting of foreign inheritances, and getting advice about minimizing taxes the estate must pay before you inherit.
Do grandchildren have a legal right to an inheritance in Canada?
In Canada, grandchildren have no automatic legal right to receive an inheritance if they are excluded from the will. The only exceptions are cases where the grandchild was financially dependent on the grandparent.
What should you do with an inheritance when receiving an inheritance in Canada?
It's recommended to invest your inheritance prudently, pay off debt, save for goals, get professional advice, and avoid impulsive spending when receiving an inheritance in Canada. Have a plan to use the funds strategically.
How do you calculate probate fees when receiving an inheritance in Canada?
When receiving an inheritance in Canada, probate fees are charged as a percentage of the estate's total value. For example, Ontario charges 0.5% on the first $50,000 and 1.5% on amounts above $50,000. The executor pays fees when filing for probate.
Is inherited property considered marital or separate when receiving an inheritance in Canada?
Property inherited during a marriage is generally considered separate property in Canada as long as it is kept separately and not mixed into shared marital assets. Inherited property remains separate during divorce.
Can an inheritance be gifted tax free in Canada?
Yes, you can gift your inheritance tax-free in Canada. Any income or capital gains earned later on gifted funds would be reported by the recipient. Also, make sure the gift doesn't trigger clawbacks of benefits you receive.
What are the different inheritance laws by province in Canada?
Inheritance laws like intestate succession, spousal inheritance rights, and probate fees vary by province in Canada. The province where the deceased was domiciled governs the inheritance administration and distributions.
Is notice required before receiving an inheritance in Canada?
Before receiving an inheritance in Canada, you should receive notice from the executor that you are a beneficiary named in the will. The executor also needs your personal details to distribute your inheritance.
How does inheritance work when someone passes away without a will in Canada?
Each province has intestacy laws governing distribution when someone dies without a valid will in Canada. The inheritance process typically takes longer without a will, and may not follow the deceased's wishes.
Can an inheritance be rejected when receiving an inheritance in Canada?
Yes, receiving an inheritance in Canada is voluntary. Beneficiaries can reject their inheritance through a formal disclaimer process notifying the executor in writing within a reasonable timeframe.
Who pays tax on an inheritance distribution in Canada?
No extra taxes beyond the deceased's final tax return are paid when actually receiving an inheritance in Canada. Estate taxes are paid before inheritances are distributed to beneficiaries.
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