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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.

61 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?

    ReplyDelete
    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?

    ReplyDelete
    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 ?

    ReplyDelete
    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?

    ReplyDelete
    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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    Replies
    1. The will doesn't control RRSPs unless they are part of the estate. So yes, if you want to use the will to impose a condition on the gift, it has to be payable to the estate and then left to a beneficiary in the will.

      Lynne

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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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    Replies
    1. That depends on whether the money is being paid as ongoing child support that's owing or whether it is strictly an inheritance. Since I haven't seen the will or know anything about the family, there is no way I can answer more precisely.

      Lynne

      Delete
  23. Hi Lynne,
    My grandmother passed a year and a half ago. Her will stated that assets were to be equally distributed to my father and uncle. My father passed 6 months ago. My Uncle is proposing to split assets of my grandma's estate with my brother and I (we are also named in my grandma's will). This would avoid my father's will going through probate as we are saying that he passed with no assets, as he had not received them yet. He also had some credit debts which will be avoided. Is there any legal risks involved in doing this? Please let me know what you think. Thanks!

    ReplyDelete
    Replies
    1. Interesting how you have decided to "say that he passed with no assets" even though he had assets. Doesn't matter if he had received his inheritance yet because it was still an asset.

      So basically you're ripping off the creditors. If they find out there were assets, I assume they'll sue.

      I don't know why your grandmother and father bothered making wills since nobody in your family seems to care what the law says.

      Lynne

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  24. My friend inherited her mother's home. She recently sold it. She owes 50K towards her mother's taxes. She also purchased a new home which the funds from the sale will go towards the mortgage.

    She is on disability. She will also owe on her own taxes.

    Will the government ask her to pay the 50k within a period of time? Does the government look at her inheritance through the sale of the home as money to be used to pay back her mother's tax bill?

    My friend believes they can't consider the money from the sale as it was an inheritance.

    Thanks

    ReplyDelete
    Replies
    1. If I understand the facts, then your friend is dead wrong. The rules are that all taxes from an estate must be paid before a beneficiary receives anything. If not, the executor who released the funds (or the house) is on the line personally for the taxes. The house itself could be sold for the taxes, and being an inheritance is certainly not going to prevent that. In fact, being an inheritance is the whole reason the taxes are owed in the first place. Taxes are due within a few months of death, and it sounds as if that time has passed. Every day that she doesn't pay, she is racking up penalties and interest. She is in for a big surprise (and not a good one) one of these days when CRA shows up at her door.

      Lynne

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  25. Hi Lynne,

    My father passed away Oct/2015 and My mom passed away Nov/2015 and we are still waiting on the estate to be done but have been told that we could split a partial amount. Are we taxed on the money that we split and is it considered a personal income?

    ReplyDelete
    Replies
    1. The splitting of a partial amount that you mention is called an interim distribution. Most executors agree to do that so the executors don't have to wait for the tax certificate, which takes many, many months. You'll find lots of info about that on this blog if you search "interim distribution" or "tax clearance certificate".

      No, you are not taxed on the inheritance you receive. You do not declare it as income. In fact, you don't have to report it at all.

      Lynne

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  26. Hi Lynne

    As the designated beneficiary of my friends pension & rrsp Im curious about the above comment about not declaring it as income. As im a friend not family do I consider it to be an inheritance or a gift? Does it matter what its called?

    Im understanding taxes will likely be paid by me not by the estate do I claim it on my next taxes or wait to be taxed
    By the CRA?

    ReplyDelete
    Replies
    1. If you get it as a result of someone dying, it's clearly an inheritance. If you want to play with semantics, go ahead, but it's an inheritance.

      Inheritance is not taxable to you any more than it is for the next person.

      Why do you understand the taxes will be paid by you? Are the pension and the RRSP the only assets? Otherwise why would you be the one paying?

      As I said, you don't declare inheritance because it's not taxable.

      Lynne

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    2. My grandfather died many years ago and my father was a beneficiary along with his siblings. My father died a few years later while all this time the siblings have been fighting over inheritance. Everything has finally been settled and in the agreement it states the beneficiaries will pay the taxes on their portions. how does a person that's been dead for 5 years pay taxes.

      Delete
  27. My father is Canadian I am a Canadian citizen. He died 4 years ago without a will.. I found out there is a little money left from some assets to be split among my siblings and I. I however grew up in the unoted states with my mother and didn't have much contact with him. Now the funds have gone to the court and we need a lawyer to disperse it?? I'm confused how Canadian laws work how do I claim this money without it costing me my portion on lawyers fees or whatever else there is?

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    Replies
    1. Usually when money is paid into court, it's because someone holding money - such as an insurance company or bank - knew that it had to pay the money, but didn't know to whom to pay it. It is usually because there is a dispute over who gets it, or because there is some confusion such as paperwork with mistakes in it that makes it hard to figure out who is entitled to the funds.

      To get the money out, someone has to apply to the court to have it paid out. Generally this requires the court to figure out the issue that caused the problem in the first place.

      The best place to start is by gathering information. Before you go ahead, you need to know why this money is in court, what caused the issue, and who are the parties who are claiming entitlement. If you're the only one with a claim, it will be quick and easy to get the funds. If there's a dispute, then it will be harder.

      If you are in touch with the executor of the estate, ask for all of the documents relating to your father's estate so you can figure out what you're up against. If you are not in touch with the executor, contact (by phone) the probate clerk in the province where your father lived to ask for the documents.

      Lynne

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  28. This comment has been removed by the author.

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  29. This comment has been removed by the author.

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  30. If someone owes in back taxes and receives an inheritance, can the government take from the inheritance?

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    Replies
    1. The government can take from any account, regardless where you got the funds.

      Lynne

      Delete
  31. Kelly (oharakg@hotmail.com)April 20, 2017 at 3:34 PM

    Our mother recently passed away and was receiving a portion of our father's pension that was left to the three of us rather than to him. Is this money that is being paid by the pension plan monthly taxable for us? Thank you!

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  32. If there is no executor at sudden death. How long does it take for a lawyer to confirm an executor in court ?

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    Replies
    1. That depends on several factors. The main delay is usually the time before the application gets to court. Obviously the lawyer can't even start until someone - family or friend of the deceased - comes forward to volunteer for the job of estate administrator.

      After that, there is usually a matter of weeks while the lawyer and the administrator try to put together the information about the deceased, his assets, his debts, his tax status, his beneficiaries, etc. How long that takes depends on how much cooperation the lawyer gets from various parties.

      After all of that, the documents are sent to the court. Once there, the court can take anywhere from two to six weeks to process the documents.

      So, in other words there is no set time because each case is different.

      Lynne

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  33. If a deceased left one million dollars cash and nothing else, had no relatives and left everything to a friend, and obviously no capital gain on cash upon death, is there any tax on the money

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    Replies
    1. Not being an accountant, I won't comment on "obviously no capital gain on cash". I guess you assume this person has cash sitting in a bank account, un-invested.

      As I said in the article on which this comment is attached, a Canadian resident living in Canada who inherits from a Canadian estate does not pay tax on the money he or she inherits.

      Lynne

      Delete
  34. Hi Lynne
    My husband received a judge ordered cash amount in stocks as enforcement of a settlement with his Deceased Father's second wife. The judge wrote Susan Smith shall turn over to the Estate of Joe Smith x dollars in RBC shares. Our accountant said the shares were in her name she transferred them so she must pay the Capital gains tax as she is disposing of them. Everything else was in joint names and with ROS. She has now ten years later died we think perhaps she did not pay the capital gains tax. My husband is one of 3 Administrators of her Estate as well as a beneficiary. We think even though the tax clearance certificate has gone through that there could be a claw back on unpaid taxes from her Estate.We are getting a copy of her tax returns as we want to be sure as l believe her beneficiaries would be responsible for her back taxes even though the Clearance Certificate has been received. All the Clearance Certificate does is protect the Administrators l believe. No we never got a clearance Certificate on my Father's Estate..

    ReplyDelete
  35. Hi Lynne, my question is why do you need to fill out insurance forms for an inheritance. As my sister is the executor of my Mom's will and she is sending the forms to myself and my brothers to fill out. I'm not familiar with this and want to know the reason for this. Thanks

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  36. My wife is the executor of her parents estate. Her father passed in 2013 and her mother in 2014. The family home and land was left to the four children. It's been 4 years since her mother passed away and they are looking at selling the home and land. If the 2014 value of the home and land was $150,000 and the sale price is $200,000, how should any capital gains be handled? Should each child receive their share, $50,000 and report any capital gains with their personal CRA taxes or should the estate/executor/my wife do something special to wrap this up. Thanks in advance

    ReplyDelete

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