What to do with an inheritance

how much canadian tax

By Jennifer Power Scott, Oct 20, 2008

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

The gift of inheritance: A "strange privilege"

Her voice soft with sadness, Ann McLeod* doesn't sound like someone who's expecting a cheque for more than $50,000. But then, the 40-year-old Toronto woman didn't win the lottery, sell a condo or hit the jackpot on the stock market.

The money is an inheritance from her father . a twinkly-eyed physician with a kind heart and a quirky sense of humour. The windfall will be quite the opposite of mad money for Ann. To her, it's a strange privilege, and a gift with heartstrings firmly attached.

"You cannot separate emotions from it," confides Ann, a single woman who moved from the East Coast to Toronto not long after her father died last year . "I just wouldn't want to dishonour lots of hard work by spending frivolously. It's a feeling of added responsibility. I mean, Dad worked his guts out for 40 years. I don't want to screw it up."

Increase in inheritances

The amount of money passing between generations of Canadians is expected to grow at an unprecedented rate. A Decima Research report on inheritance says Canada's frugal seniors and affluent baby boomers will leave nearly a trillion dollars to their offspring in the years to come.

And while the average inheritance in Canada is $56,000, Decima predicts the figure will swell to about $300,000 in cash, real estate and other valuables. The state of estates is in a fascinating flux.

After the windfall

The bittersweet bonanza leaves many heirs bewildered by the tax implications and wondering what to do when the inheritance cheque lands in their hands. "That can be very dangerous," says Ann. "Because there are a lot of people in this world who might go out and blow the whole thing in a week, and that's not appropriate."

Financial experts agree. Unless you're well-heeled to begin with, flushing the funds into trips to Las Vegas, sexy cars and plush home theatres probably isn't the smart way to go. It's best, they say, to take a breath.

"Some people are actually quite frozen when they receive an inheritance from someone close to them. They almost feel the person in it," explains Sandra Foster, author of You Can't Take It with You: Common-Sense Estate Planning for Canadians (Wiley, $27.95). "My feeling is when you receive money, put it somewhere safe that earns a good guaranteed rate of interest for a few months while you think things through. Don't do anything rash."

Page 1 of 4 – Discover the importance of a financial planner on page 2.

How to find a financial planner & discussing your options

Once you are ready to make decisions about your money, there are plenty of people who can help. Teresa Black Hughes, a financial planner and investment adviser in Vancouver, recommends tracking down certified financial planners in your area by visiting the websites for Advocis, the Financial Planner Standards Council or the Institute of Advanced Financial Planners.

Foster, meanwhile, says beneficiaries who don't have much financial savvy shouldn't worry about looking stupid. "You have to ask questions," she says. "When you go to a doctor and are afraid of what might be wrong, you write down the questions you want to ask . right? It's the same thing when you go to a financial adviser . And if the adviser puts you down, that's his problem. Go talk to someone else."

Assessing your options

An inheritance – and some good advice – helped Julia Rose* survive a dark period. In the mid-1980s, her husband walked out on her and their baby son, and she got sick and was forced to go on welfare.

Worst of all, Julia's beloved grandmother died. When she inherited $63,000, she didn't know what to do. "For the first year and a half, I thought, I don't care about the money. I just want her back," says Julia, a 50-year-old musician in Saint John, N.B.

Knowing she wasn't emotionally equipped to make big financial decisions, Julia turned to a credit union manager and other professionals. On their advice, she bought a house and took in tenants. "It worked out exactly as they all said it would," says Julia, still a landlord more than 20 years after buying her first home. "It meant I could work part time . I could raise my son. The rest of my life was possible because the house was paying for some of its own bills."

Options for beneficiaries

While real estate was golden for Julia, it isn't everyone's best choice. Beneficiaries have plenty of options. "It kind of all depends on what your circumstances were before," says Jack Courtney, assistant vice-president of Advanced Financial Planning with Investors Group.

"I'm sort of loathe to say people should just go and treat themselves because some people might have been treating themselves all along. This might be their last opportunity to set things straight, so maybe they need a bit more discipline ."

Ann says she and her three siblings will likely have different ways of using their inheritance money. "My brother is in a different situation from me. He makes $250,000 a year. I don't, and I never will. He may pay off his mortgage, or beef up an RESP for his kids . I'm not in a position to do any of that. I have to be much more careful because I don't have a pension."


Debt-busting is a priority for many people. Others funnel inheritance money into RRSPs or other investments. The key, says Courtney, is to think about long-term goals. "It pays to step back a little bit," he says.

"Some people will immediately say, I've got this money, I don't deserve it all, and maybe I should start helping out my kids right away. But they need to make sure that their financial future is properly secured before they do that."

Page 2 of 4 – Confused about taxes? Find out how taxes apply to inheritance on page 3.

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.

Special cases and considerations

Minority matters

If Grandpa leaves big money to little Bobby . it doesn't mean your child is going skateboarding with wads of cash stuffed in his baggy jeans. As Foster explains, children can't legally own assets or property until they reach the age of majority. It's important, she says, to set up a testamentary trust in the will.

"If you don't set up a testamentary trust in your will for anything that a minor will inherit," says Foster, "what he or she would inherit is held by the public guardian and trustee of your province. And then when the person turns 18 or 19, depending on which province you're in, he or she gets a cheque to do whatever with."

Not everyone, of course, thinks it's a good idea to drop a pile of cash in a teenager's lap . Some wills stipulate the teen will get money little by little. "If it's $100,000, maybe you appoint the parent or another responsible person to manage it until the age of 21," says Courtney. "If you're still not comfortable, perhaps at 21 the person gets a small portion, and the rest at age 25. The bigger the sums, the longer the staged payout."

Beneficiaries who are disabled

It can be just as critical to set up trusts for loved ones who are disabled. If they inherit money, people living on social assistance and on disability pensions are at risk of losing their government benefits.

"The best way for families to provide for the financial and social well-being of a relative with a disability is to establish a discretionary trust," says Al Etmanski, president of the nonprofit organization Planned Lifetime Advocacy Network. "The trust is not deemed an asset of the individual, and therefore he maintains his eligibility for government benefits."

Another option is the registered disability savings plan (RDSP). It will allow anyone to invest for a relative or friend who has a disability and is 59 or younger. "The RDSP is breathtaking in its appreciation for the concerns of people with disabilities and their families," says Etmanski.

A gift to last

Financial advisers agree that planning ahead is smart. If you expect to receive an inheritance one day, it's a good idea to talk it over with your parents. "Just knowing what Mom and Dad would have wanted for that money relieves a lot of stress," says Black Hughes.

Being a beneficiary can come with red tape, rigmarole and wrenching emotion. But with careful planning . an inheritance can turn into a gift that lasts. Julia, for one, is sure of that. "When I open my eyes, I know that I am in this house because of my grandparents," she says. "That feeling never goes away."

Inheritance and divorce

Things can get dicey when it comes to inheritance and divorce, cautions Georgialee Lang, a family lawyer in Vancouver. If you are in a shaky marriage and inherit money, Lang recommends keeping it separate from the family assets. "Open up a new bank account in your name alone," says Lang. The laws vary somewhat from province to province, but in most parts of Canada, keeping your inheritance money separate from marital assets gives you a good chance of keeping it all in a divorce.

If you use even a portion of the inheritance cash for trips . mortgages or other family expenses, Lang says the courts could decide the inheritance is a marital asset and award a chunk of it to your ex. If you inherit a house, it becomes family property if you and your spouse move in.

"Anyone receiving an inheritance may want to seek legal advice on how best to structure it, given the high divorce rate, even later in life," says financial expert Sandra Foster. "I'm amazed at the number of people who get divorced between the ages of 50 and 60."

*Names have been changed.

This story was originally titled "Sudden Wealth: Inheritance Dos and Don'ts" in the November 2008 issue. Subscribe to Canadian Living today and never miss an issue!

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Source: mobile.canadianliving.com

Category: Taxes

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