In Canada, an inheritance is when assets, property, or money are transferred from a deceased person to a beneficiary. Beneficiaries are often family members, but can also be friends or even a charitable organization.
As the Canadian baby boomer generation ages, a significant transfer of wealth is expected to occur, leading to a rising trend of inheritance for millennials and Gen Z. Many boomers have amassed considerable assets and property over their lifetimes, and as they pass away, their estates will be inherited by their children and grandchildren. However, no matter your age, or what generation you’re from, an inheritance could lead to increased financial security, improved access to homeownership, and opportunities for investment and wealth-building.
Overall, inheritance in Canada has legal, financial and tax implications that need to be understood and properly managed by the beneficiary to ensure a smooth transfer and to make the most of inherited assets. An inheritance could certainly change a life for the better, but it also comes with responsibilities and potential challenges that should not be overlooked. Being knowledgeable and prepared for an inheritance will empower you to handle its responsibilities effectively and maximize the opportunities it offers.
Different assets received in inheritance
Inheritances can consist of various assets, ranging from financial assets like cash, stocks, and bonds, to tangible assets like property, vehicles, and even an art collection. Here are some common assets that beneficiaries may receive in an inheritance.
Registered accounts
You could inherit registered accounts like RRSPs, RRIFs and TFSAs.
Investments
Investments include assets like stocks, bonds, mutual funds, and GICs.
Real Estate
Real estate like a primary residence, vacation property, or rental property, can be part of an estate. You can choose to retain, sell, or rent out the property.
Learn more about capital gains tax and inherited property →
Business Interests
If the deceased owned a business, the beneficiary may inherit their share of the company. This can include ownership interests, partnership stakes, or shares in a corporation.
Personal Possessions
You could also inherit personal belongings, furniture, vehicles and household items, as well as valuables like a wine or art collection or jewellery.
Digital Assets
These days it’s becoming increasingly popular to inherit digital assets like cryptocurrency, social media accounts, website domains and more.
What’s the difference between an inheritance and a gift?
Inheritance and gifts are both related to the transfer of assets or property from one person to another, but they have distinct legal and tax implications. The main difference is that to receive an inheritance you must receive it from someone who is deceased and it must be given via a will.
Be aware that each of these assets can have their own financial and tax implications so it can be helpful to consult with a financial or legal expert.
Learn more about primary and contingent beneficiaries of gifts and estates→
How do you receive your inheritance from an estate?
The inheritance process in Canada can be somewhat long and complicated, depending on the complexity of the deceased person's estate. On average, it may last anywhere from six to 18 months, so you’ll need to be patient. If you've just experienced the loss of a parent, and are wondering about next steps, read this guide.
That said, here is a general step-by-step guide to the inheritance process in Canada.
1. Give the executor room to work and a way to contact you
There is much to be done when a person first dies, including things like the issuing of a death certificate and accessing the will and identifying all the assets and debts. These tasks are performed by an executor who will be responsible for managing the deceased's estate and distributing assets according to the terms of the will. Executors need to keep beneficiaries informed of the settlement process, so they'll need a way to contact you.
Remember, because there is so much to be done initially, it may take time for you to receive notice about your inheritance.
2. Keep an eye out for the probate application
The executor may need to apply for probate to continue administering the estate. Probate is the legal process that confirms the validity of a will and grants the executor the authority to act on behalf of the estate. The probate process and fees vary by province and territory in Canada. For example, probate fees in Ontario are different from fees in Newfoundland and Labrador. As the will begins going through probate, the executor will identify all the assets and reach out to potential beneficiaries about the application.
3. Find out how long the mandated waiting period will be
In general, most regions of Canada impose restrictions on executors, preventing them from distributing assets from an estate until a specific period has elapsed. This waiting period is to allow time for parties to make claims against the estate or challenge the validity of the will. For example, in B.C. executors are not allowed to distribute assets to beneficiaries until at least 210 days after probate is granted, except in cases where a court permits an earlier distribution or when all beneficiaries reach an agreement.
4. Receive your inheritance
After all debts and estate taxes are settled in accordance with estate law, the remaining assets can be distributed to the beneficiaries according to the terms of the will.
Keep in mind that the timeline of the inheritance process can vary widely based on several factors, including the complexity of the estate, the presence of disputes among beneficiaries or creditors, and the efficiency of the executor or administrator.
Overall, your responsibilities during the inheritance process mainly involve providing information to the executor or administrator, cooperating with any necessary paperwork or legal requirements, and being patient while the estate is administered and distributed. It’s a good idea for beneficiaries to also consider seeking legal or financial advice if you have any questions or concerns about your rights, tax implications, or how to manage your inheritance wisely.
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Inheritance tax in Canada
It’s important to ensure you understand what your responsibilities are regarding taxes when it comes to an inheritance because you don’t want to run afoul of Canadian inheritance tax laws and get on the wrong side of the CRA.
Is inheritance taxable in Canada?
"The biggest misconception Canadians have about inheritance tax is that it exists, when in fact Canada doesn't have a specific tax for inheritances," says Sara Azad, a Certified Estate Planning Expert in Ontario.
In Canada, there is no inheritance tax. For income tax purposes, most of the estate’s assets are deemed to be sold at fair market value upon death (unless some assets in the estate are inherited by the surviving spouse or common-law partner, where certain exceptions are possible). Note also that some things like investments or real estate may be subject to capital gains tax.
The executor will have to submit a final tax return and pay any estate taxes. Therefore, money and personal items received from an inheritance, are not considered taxable income by the Canada Revenue Agency because the appropriate taxes have already been paid by the estate. This means that, in general, you won’t have to pay taxes on any money or personal items you receive, however, if you invest your inheritance money and then earn income on those funds (like interest or dividends), you’ll then be taxed on the income earned.
Note also that there are some registered accounts like RRSPs and RRIFs that can only be transferred to a surviving spouse or common law partner (a.k.a a qualified survivor) on a tax-deferred basis. For non-spousal beneficiaries (non-qualified survivors), the registered account would be taxed before you receive the remaining funds. A TFSA is also a registered account; however, beneficiaries can inherit the funds in a TFSA without any tax implications, though if you are a non-qualified survivor, the account will be closed before you receive the funds.
While traditional inheritance is tax-free, living inheritance can have more tax complications. If you're interested in giving or receiving inheritance while both you and the other party are still alive, read our article about living inheritance.
Estate taxes on a deceased person’s assets
There are different factors that can effect how your estate is taxed, including whether or not a spouse or common-law partner inherits certain assets.
With a surviving spouse
When there is a surviving spouse or common-law partner, many assets can be transferred on a tax-deferred basis:
- Capital property can be transferred at its original cost basis, deferring capital gains taxes.
- Registered investments can be transferred to the spouse's own registered accounts without triggering immediate taxes.
- The principal residence can typically be transferred tax-free.
This "spousal rollover" provision allows for the deferral of taxes until the surviving spouse sells the assets or passes away.
Without a surviving spouse
When there is no surviving spouse, the full tax implications of deemed disposition generally apply. This means:
- Capital gains on appreciated assets are taxed on the deceased's final tax return.
- The full value of registered investments is added to the deceased's income and taxed accordingly.
- The estate is responsible for paying these taxes before distributing assets to beneficiaries
Property inheritance tax in Canada
Things can be a bit more complicated when a property is part of a deceased’s estate. If you inherit a house, it is generally not considered taxable income but if you sell the house and it increases in value from the time you inherited it, you may be taxed on the capital gains. Note that there is a capital gain exemption if the inherited home is your principal residence. If you inherit a home with a reverse mortgage, the estate would first have to repay the lender and may have to sell the home to pay back the mortgage.
Taxes can be one of the most complicated aspects of inheritance. Seeking professional advice is essential to understanding and complying with the relevant tax laws and making informed decisions regarding the inheritance.
Foreign inheritance tax in Canada
When a Canadian receives an inheritance from another country, it is generally not considered taxable income. However, there are a few important things to consider:
- If the income earned by the foreign estate is taxed at the trust level, Canadian beneficiaries typically do not owe additional tax. But if the estate's income is taxed in the hands of the beneficiaries, beneficiaries may owe tax on the foreign inheritance they receive.
- Any future income generated from the inherited assets will be subject to Canadian taxation, even if the income is not brought back to Canada.
- Canadians inheriting foreign property must report the inheritance to the CRA by filing a T1142 form. Failure to file can result in penalties.
- If an inherited property generates income, such as from renting out foreign real estate, that income must be reported to the CRA and may be subject to tax.
Preparing to receive an inheritance
An inheritance has the potential to change your life. Here are some steps to take to prepare for an inheritance.
- Pause and process: Take some time to process your emotions and carefully consider your options.
- Discuss with family members: Discuss your intentions and also listen to them and be open to their perspectives to minimize potential conflicts. On the other hand, you also want to be wary of any unsolicited advice or pressure from others on what to do with your windfall.
- Professional help: Consider reaching out early to a financial advisor or accountant.
- Make a plan: Finally, it’s wise to outline how you may want to use the inheritance for things like investing, buying a home or paying off a debt. It can be initially very overwhelming if you receive a large amount of money and tempting to splurge. By carefully setting out a plan beforehand, you can ensure you make the most of your inheritance for the long-term.
How long does it take to get an inheritance?
So long as the will is not contested, the probate process is complete, and debts and taxes have been paid off, beneficiaries usually get their inheritances several months after the estate owner passes away. If the estate is large or complex, it may take longer.
However, if the will is contested, all asset distribution is frozen until the challenge is resolved, which means inheritance can sometimes take years to finally be distributed to beneficiaries.
If you're a common law partner who is expecting an inheritance, check out this article on common law inheritance in Canada.
What to do after receiving an inheritance?
After receiving an inheritance, it's essential to approach the situation with careful consideration and strategic planning. Here are some steps to take after receiving an inheritance.
- Review your financial situation: If you haven’t already done so, assess your current financial status to get an understanding of your overall financial picture. If you receive cash, plot out what part of your inheritance you want to devote to savings or spending, keeping in mind your long-term financial goals.
- Seek professional advice: Reach out to financial advisors, estate planners, and tax professionals to fully understand the implications of your inheritance. Professional guidance will help you make informed decisions and optimize the use of the assets.
- Pay off debts and build an emergency fund: Consider using some funds to pay off any debts you have and start to build an emergency fund.
- Consider charitable giving: If there are any causes or charities you feel passionate about consider making charitable donations.
- Avoid impulsive spending: While it may be tempting to indulge in lavish spending, avoid making impulsive decisions. Stick to your financial plan and use the inheritance wisely for long-term benefits.
Learn more about what to do after getting an inheritance →
By following these steps and being mindful of your long-term financial goals, you can make the most of your inheritance while preserving and growing your wealth for the future. Be proactive and plan ahead to ensure your estate is structured in a way that minimizes taxes, providing greater security for your loved ones—start your estate planning today with Willful to protect your assets for the future.
