Receiving an Inheritance in Canada: A Comprehensive Guide

Inheriting assets from a deceased loved one can positively alter your financial trajectory. As highlighted in the Last Will and Testament, understanding how inheritances are handled is a crucial part of estate planning. 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 around inheritances in Canada, equipping you to properly handle the responsibilities and maximize the benefits.

What are the Current Inheritance Trends and Statistics in Canada?

According to BMO InvestorLineStudy, 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.

British Columbians expect to receive the highest provincial average inheritance at $120,000, while Maritimers expect the lowest at just $32,000.

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.

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.

What Steps Are Involved in Receiving an Inheritance?

Receiving an inheritance involves a defined legal process with 5 important steps:

Being Named as a Beneficiary in a Will

• The starting point is being named as a beneficiary in the deceased’s will – the legal document that specifies who should inherit their assets upon death.
• 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. An outdated will can cause major issues.

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 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 inheritances methodically to beneficiaries
• This entire estate settlement process usually takes many months or even years, depending on assets, debts, and the estate’s complexity.

Probate Court Validates the Will

• The executor must apply for probate – the court process that reviews and formally approves the will.
• 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. For example, Ontario charges 0.5% on the first $50K, then 1.5% on amounts above $50K.

Mandatory Waiting Periods Must Pass

• After probate is granted, most provinces require a waiting period before the executor can distribute inheritances.
• This mandated time period allows any legal challenges to the will or creditor claims against the estate to be resolved.
• For instance, British Columbia requires a 210-day waiting period unless the court approves earlier distribution or all beneficiaries consent.

Finally, Receiving Your Inheritance

• Once the waiting period has fully expired, all estate taxes and debts have been paid, and the will is undisputed, the executor can finally distribute the inheritances.
• Beneficiaries will need to provide their identification, contact details, and banking information to the executor to facilitate the transfers.
• After months or years, beneficiaries ultimately receive their inheritance from the net estate assets, according to the terms in the deceased’s will.

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. Inheritance recipients do not pay income tax on inheritances they receive.
• 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

• When assessing an estate’s value, the CRA deems any property owned at death to be disposed of at fair market value on the day before death. This can trigger capital gains taxes.
• For example, if a cottage purchased for $200,000 was worth $500,000 at the date of death, the $300,000 capital gain would be taxable on the final return.
• Only 50% of capital gains are included in taxable income. In this case, $150,000 would be added to the final return and taxed.

Significant Exceptions for Spousal Inheritances

• Special tax rules apply when a spouse or common-law partner inherits estate property. Assets typically transfer tax-free to a surviving spouse.
• The spouse acquires the inherited property at the deceased’s original tax cost rather than fair market value. Taxes are deferred until the spouse eventually disposes of the assets.
• RRSPs and RRIFs can also rollover tax-free to a surviving spouse beneficiary under spousal rollover provisions.

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.
• Engaging a tax specialist is highly advisable when inheriting foreign property or assets due to the complexity of the reporting.

Professional Tax Help Strongly Recommended

• Due to the complex interplay between inheritance and taxes in Canada, proactively obtaining professional advice from an accountant or tax lawyer is strongly recommended.
• Proper tax planning and compliance help ensure you don’t take on any unnecessary tax liabilities associated with your inheritance down the road.

Full review: Inheritance Law in Canada

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 Recommended Next Steps After Receiving an Inheritance?

Once the inheritance payment is deposited into your account, here are five recommended actions:

Review Your Overall Financial Picture

• Thoroughly examine your complete financial situation, encompassing your assets, liabilities, income streams, and expenses.
• This high-level perspective provides the clarity and context needed to make shrewd strategic decisions about employing your new inheritance capital.

Continue Relying Heavily on Trusted Advisors

• Have ongoing follow-ups with your trusted financial and legal professionals. Their experienced input will prove invaluable in guiding your decisions to optimize the use of your one-time inheritance windfall.
• Develop a customized investment plan for the inheritance with your advisors that matches your risk profile and goals.

Avoid Splurging – Stay Disciplined

• It’s tempting to celebrate a windfall by indulging in spontaneous luxury purchases. But unrestrained spending will quickly deplete your new capital.
• Remain financially disciplined and follow your written plan, keeping your adviser-recommended long-term investment strategy front and center. Don’t let emotions drive financial decisions.

Invest New Capital Very Strategically

• Preserve and prudently grow your inheritance over the long-run by making wise investments based on in-depth conversations with your financial advisor about optimal asset allocation fitting your risk tolerance and objectives. Don’t invest casually.
• Your advisor can recommend suitable investment asset classes, vehicles, or opportunities to consider that are in line with your goals.

Donate to Charitable Causes You Care About

• If philanthropy is important to you, analyze allocating a portion of your inheritance as donations to causes or charities you feel passionately about.
• This can add deeper meaning and fulfillment to your financial windfall by giving back and benefiting others in need.

How do Canadians Use Inheritances?

The BMO survey 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

Common Mistakes and Pitfalls That Erode Inheritances

While receiving an inheritance provides a valuable chance to enhance your financial position, beneficiaries often make costly mistakes that significantly reduce their windfalls. Here are some common pitfalls to be aware of:

• Inadequate Tax Planning: Not fully understanding tax obligations or proactively tax planning around the inheritance, leading to unnecessary taxes eating away at the capital received.
• No Clear Investment Strategy: Failing to formulate a well-defined strategy for how to strategically invest and allocate the inheritance capital to improve long-term financial standing. Lacking investment clarity and purpose.
• Getting Enticed By Market Timing: Attempting to time the real estate or stock market when investing your inheritance, rather than gradually dollar-cost averaging into the market over time based on a plan. Market timing rarely succeeds long-term.
• Choosing Overly Complex Investments: Opt for esoteric, highly complex investments or asset ownership structures that you don’t fully comprehend. Simplicity and prudent diversification are generally better approaches for most investors.
• Not Using Advisors: Deciding to independently manage a significant inheritance entirely on your own without input from experienced financial advisors, accountants, lawyers or tax experts. Their input is invaluable.
• Indulging in Impulsive Splurges: Rushing out and making extravagant luxury or indulgent purchases that don’t align with your financial goals just because you suddenly have this unexpected windfall. Buyer’s remorse often follows.
• Poor Communication with Family: Failing to clearly communicate with other beneficiaries or family members about your inheritance plans. This breeds resentment and suspicion if expectations aren’t proactively managed.
• Not Confirming Liabilities: Neglecting to verify any debts, taxes or other liabilities you may be taking on along with the inherited assets. Surprise obligations can quickly deflate inheritance capital.
• Lacking Patience: Feeling rushed to deploy your inheritance capital without taking sufficient time to research options, pay down debts, and make strategic plans aligned with your risk appetite. Patience pays.

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) about Receiving An Inheritance in Canada