Inheritance in Canada: Tax Guide

Understanding Inheritance Taxation

The Canadian approach to inheritance:

• Estate pays tax: Deceased's final return includes deemed disposition
• Beneficiary receives net: After estate taxes are settled
• No tax on receipt: Inheritance itself isn't taxable income
• Future income taxable: Earnings from inherited assets are taxed

Inheriting Cash

Cash inheritances are completely tax-free:

• Not reported as income
• No forms to file
• No limits on amount

What to Do with Cash Inheritance

• Consider TFSA contributions (up to your room)
• RRSP contributions if you have room
• Pay down debt
• Invest in non-registered accounts

Inheriting Property (Real Estate)

Your Cost Base

You inherit property at its fair market value at death (or the value used on the deceased's final return):

• This becomes your adjusted cost base
• Any pre-death appreciation was taxed on the estate
• Only future gains are your responsibility

Example

Parent bought cottage for $100,000, worth $400,000 at death:

• Estate paid tax on $300,000 gain
• Your cost base: $400,000
• You sell for $450,000: You pay tax on $50,000 gain

Principal Residence

• If inherited property was deceased's principal residence, they may have claimed PRE
• Your principal residence status is independent
• May affect your own PRE claims if you have multiple properties

Inheriting Investments

Stocks and Mutual Funds

• You receive them at FMV at death
• New cost base for your records
• Dividends and interest are your taxable income
• Future capital gains are your responsibility

Record Keeping

• Get documentation of FMV at date of death
• Keep estate paperwork showing transferred values
• Track your adjusted cost base carefully

Inheriting RRSPs and RRIFs

From a Spouse

• Can transfer to your own RRSP or RRIF tax-free
• No tax until you withdraw
• Complete rollover preserves tax deferral

From Non-Spouse

• Full value is taxed on deceased's final return
• You receive the after-tax amount
• Cannot transfer to your RRSP (already taxed)

Financially Dependent Child

• May be able to purchase an annuity to age 18
• Disabled dependent: Can transfer to RDSP
• Special rules apply—consult a professional

Inheriting TFSAs

As Successor Holder (Spouse Only)

• TFSA transfers directly to you
• Doesn't use your contribution room
• Continues as tax-free account

As Beneficiary (Anyone)

• Receive the value tax-free
• TFSA status ends at death
• Any growth after death is taxable to you
• Can contribute to your own TFSA (uses your room)

Foreign Inheritances

From Non-Canadian Estate

• Generally tax-free in Canada
• May have been taxed in source country
• Report large amounts on Form T1142
• Future income is taxable

Form T1142

If you receive a distribution of $10,000+ from a foreign trust (including an estate), you must file Form T1142.

Currency Conversion

• Convert to CAD at exchange rate on receipt date
• This becomes your cost base for investments
• Keep records of exchange rates used

Inheriting a Business

Small Business Corporation Shares

• May qualify for capital gains exemption on estate return
• Your cost base is FMV at death
• Future sales may qualify for your own exemption

Active Business Assets

• May be subject to recapture of CCA
• Complex valuation issues
• Consider professional appraisal

Impact on Your Benefits

No Immediate Impact

Inheritance itself doesn't affect:

• GST/HST credit
• Canada Child Benefit
• OAS (no clawback from inheritance)

Future Income May Affect Benefits

Investment income from inherited assets will affect income-tested benefits in future years.

Executor Responsibilities

If you're also the executor:

• File deceased's final return
• Obtain clearance certificate before distribution
• Ensure all taxes paid before distributing estate
• Personal liability if taxes remain unpaid

What Records to Keep

• Copy of will and probate documents
• Estate accounting and distributions
• Fair market values at date of death
• Transfer documentation from estate
• Your adjusted cost base calculations

Common Questions

Do I report inheritance on my tax return?

No, unless it's income (like RRSP from non-spouse). The inheritance itself isn't reported.

Is there a limit to tax-free inheritance?

No limit in Canada. Estate pays any applicable taxes.

What about US estate tax?

US citizens/residents or US property may be subject to US estate tax. Consult a cross-border specialist.

Planning with Inherited Assets

• Review your overall portfolio: May now be over-concentrated
• Consider tax-efficient investing: Hold interest-paying investments in TFSA/RRSP
• Update your own estate plan: Ensure your wishes are documented
• Consult professionals: For large or complex inheritances