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Tuesday, June 8, 2010

Is money I get from an estate taxable?


I'm frequently asked this question, and I'm not surprised. Every beneficiary wants to know what the impact of a gift will be.

A general rule for estates that are administered in Canada and paid to Canadian beneficiaries is that inherited money is not taxable. So if one of your relatives leaves you $100,000 in cash in their Will, you don't have to pay tax on the $100,000.

Another general rule is that when there is a gift that gives rise to tax, the tax is paid by the estate. For example, let's look at what would happen if the $100,000 that was left to you was not held in cash, but was held in an RRSP. If you are the spouse of the deceased (or in limited circumstances, a handicapped child of the deceased), the full $100,000 of the RRSP can roll over to you without you having to pay tax at the time it's rolled to you. (The tax payment is deferred until you pass away or take the money out).

But if you are not the spouse of the deceased, then the tax situation is completely different. Everyone who has an RRSP knows that when the money goes in, it is not taxed. When it comes out, it's taxed. On estates, the law says that the deceased's RRSP is considered cashed out at the time of death. That means the tax has to be paid. Debts of an estate, including taxes, are normally paid out of the residue of an estate. For a beneficiary inheriting an RRSP this should mean that he or she gets the full value of the RRSP and the tax is paid by the estate. This assumes, of course, that there is actually enough money in the residue to pay it.

A similar issue arises with capital gains tax on real estate. If you inherit the house that was the deceased's principal residence, then there is no capital gains tax to worry about because a principal residence is exempt from it. But you might have been left the cottage or a revenue property or other real estate. On those properties, capital gains tax will arise. Normally this tax is paid from the residue of the estate, assuming there is cash enough to pay it.

Keep in mind that in particular circumstances, the beneficiary could still be affected by tax arising from the gift. The wording of a Will can make a big difference. In some Wills, the deceased has stated that each person who inherits something under the Will will pay the tax on his or her own inheritance, instead of the estate paying it. That is perfectly legal.

Another important note about estate money is that the fees taken by an executor for his or her work on the estate are taxable. They must be included as earned income on the executor's personal income tax return.

Estate taxes are tricky. Executors should be careful and consult accountants or estate lawyers if things get complicated.

36 comments:

  1. Are there taxes involved for a Canadian inheriting (cash) from an American estate?

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  2. what about a non canadian inheriting a canadian estate? are there taxes involved in that scenerio?

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    Replies
    1. I couldn't possibly know the tax rules for everywhere in the world :)

      Lynne

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  3. If I understand correctly it's better (cheaper, taxwise) to inherite cash than real estate property ? There will be no tax on cash what so ever? So, when there are no debts: The full amount of the banking account can go to the benificiary?

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    Replies
    1. I assume that you mean cheaper taxwise for the beneficiary than for the estate. It doesn't make much difference if the dollar value of the property is the same as the bank account, since the beneficiary doesn't pay inheritance tax on either of them. If a beneficiary inherits cash and that cash earns income in the hands of the beneficiary(interest, dividends etc) then the beneficiary will pay tax on that income.

      Lynne

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  4. Lynne - Thank you so much - this has been most helpful!!!

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  5. If there is no will and the life insurance is paid to the estate and subsequently distributed to the family, is the distribution taxable income in the hands of the family members.

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    Replies
    1. If you're talking about Canadian residents inheriting from a Canadian estate, then no, there is no tax on the inheritance.

      Lynne

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    2. Thank you so much. Your advice and website is such a blessing to all of us.

      God Bless You

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    3. You're welcome. And thanks, a little blessing never hurts :)

      Lynne

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  6. My father was to inherit money from his mother's estate. He passed away before he received the inheritance. The executor of his mother's estate has sent a release to me. (I'm the executor of my father's estate) Is the inheritance money still tax free upon receipt to his estate? Or does something change upon the death of the beneficiary?

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    Replies
    1. Hello,
      No, beneficiaries in Canada aren't taxed on what they receive, and in this case your father's estate is receiving it on behalf of the beneficiaries of your father's estate. Keep in mind though, that if your father's estate has other assets that trigger tax, the money inherited from his mother may end up being used to pay that other tax.

      Lynne

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  7. My Wife is half owner of our cottage property with her Mother. If my Wife's Mother passes, what are the tax implications. We plan to keep the cottages in the family for now, but, may sell in the future. Two part question. Thanks

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  8. My son passed away in March 2013 he was 43 he never married and had no children. He didn't really have any money in bank accounts either. But in is RPP there is about $115,000. He didn't have a will or an executor. My daughter filed to become a trustee which was granted. We have decided to share the funds between myself, his father his sister and brother. Do the estate show the $115,000 plus CPP benefits and also a tax refund from 2012 as income and once the taxes are paid then the funds can be distributed. Are funeral expenses an expense against any of the estate income?

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    Replies
    1. Hi Rebecca,
      I'm very sorry to hear about your son's passing. Yes, the funeral expenses should be shown on the list of debts for the estate, and estate funds should be used to pay them.

      Lynne

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  9. Hi Lynn,
    Do my siblings and I pay tax on any cash given to us from Mom's bank account , when she passes?

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  10. Do I have this correct?
    If a named specific investment account, that has accrued unrealized capital gains, is given to a specific beneficiary and the residue of the estate is given to a different beneficiary. Is it correct that the resulting capital gains taxes on the investment account will be paid from the estate residue, not the investment account,unless otherwise specified.

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  11. Further to the post above... regarding specific investment account.

    If no arrangments for executor fees are stated in the will and the executor is not a beneficiary, would any claim for fees come strictly from the residue and not pro rata the investment account?

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  12. My siblings and I were given money left by our father upon his death. The money came out of a business account not a personal account. Is that money considered a gift? In my fathers will he specifically stated that WE are responsible for the taxes not his estate. I have a sibling challenging this.

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    Replies
    1. Interesting. Why on earth was this payment made from a company? It was your father who passed, not the company, even if he owned all the shares. This was a mistake by the executor. Normally taxes come out of the estate, but where the will says that beneficiaries are responsible for the taxes, they will be responsible.

      Lynne

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  13. If I decide to give money to my children in the year preceding my death as a gift, would this money be considered taxable?

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  14. Are there taxes involved for a Canadian inheriting (cash) from an out of country estate?

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  15. My ex-spouse passed away and as he hadn't updated his rsp beneficiary I received the small amount he had saved. My question is, I received a cheque from his bank do I have to deposit this into my rsp account or can I put in my regular bank account?

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  16. Hi Lynne. I have a friend who was left property and cash from her late parents. She hired an agent to sell the property in which back taxes were owed but she did not know about. Now the Canadian government has put a hold on her account that is part of the estate in which there is plenty of money to pay the back taxes but they are telling her she has to come up with the funds herself. Why can't the estate pay it because she does not have the funds and they have threatened to confiscate her whole account if she does not pay it.

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  17. Hi Lynne,

    If I do not have any income and my parent is wanting to gift me cash before she passes away
    Do I pay tax on the cash ?

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    Replies
    1. If the gift is cash, no you won't be taxed on it. By the way, I'm biting my tongue not to give a longer answer about whether you'll have to repay it to equalize an estate with siblings, since you didn't ask. It just kills me to answer a question with no context!

      Lynne

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  18. If a parent leaves her furnishings to her children after passing, do you have to pay tax on them? e.g; dressers, beds, paintings, little nick nacks.
    Or if she gifted them in writing signed & dated prior to death, do the children still have to pay tax on them?

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    Replies
    1. If the estate is in Canada and the beneficiaries are in Canada, there is no tax on what is inherited. It makes no difference whether the items were left in her will or by Memorandum of Personal Effects as you have described.

      Lynne

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  19. If my father split his estate equally between my sister and I and she wanted the entire house but the estate did no have enough money in it to cover the other half what could she do

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  20. I am the power of attorney and power of health for my mother. She is terminally ill and will pass in the next 2 years. She has accumulated some savings and also some rrsp funds.
    My questions are what is the best way to have these funds taxed the least. She has already paid taxes on these savings and im afraid that ( unfortunately) when she passes that these funds will be taxed again under her estate. She has no spouse and no will in place either. Any thoughts would be appreciated

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  21. This is very helpful, thanks. A specific question around this issue (I'm quoting from your article):

    In some Wills, the deceased has stated that each person who inherits something under the Will will pay the tax on his or her own inheritance, instead of the estate paying it. That is perfectly legal.

    For this to apply, does Y rrsp have to be left to the estate, and then the X beneficiary named as the recipient of Y, subject to X paying the taxes? Could it also work that Y RRSP passes outside the estate by X being nominated as beneficiary, but the will provides that X should pay any estate taxes due on Y (I can't really see that working, but thought I would ask...)

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  22. My son in law passed away and left money for his minor child. Now mother gets every month some amount from his estate for daugther expenses. Is that amount taxable

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