Is inheritance taxable?

Question from Cathy:

If you inherit money from a relative, are you required to pay tax on the money received?

Answer;

No it is not taxable to you but may be taxable to your father in his final return, There are different scenarios of how it will be treated depending the relationship of the beneficiary and source the funds. Spouse or common-law partner or qualified dependent can roll over the deceased RRSP or RRIF without any tax consequence to the deceased or the beneficiary. I assume your question is for inheritance other than from a spouse.

Example 1:

For example, lets assume that your father contributed $5000 in his RRSP and named you as beneficiary of his RRSP in the plan or in the will. Let’s assume on the date of death it was $5250 and on the settlement date (the date financial institution processes the trade and sends the money to you) it was $5400.  You will get a T4RSP tax slip from the financial institution for income earned after the death  (i.e. $150) and this needs to be included in your income in the year of settlement. Your father’s executor/ executrix will receive a T4RSP for $5250. This has to be included in your father’s final tax return as income.

Example 2:

For example, lets assume that your father contributed $5000 in his TFSA and named you as beneficiary of his TFSA in the plan or in the will. Let’s assume on date of death it was $5250 and on settlement date (the date financial institution processes the trade and sends the money to you) it was $5400.  You will get a T4A tax slip from the financial institution for the income earned after the death  (i.e $150) and this needs to be included in your income in the year of settlement.  But $5250 is not taxable income to your father because the TFSA contribution was done with after tax money.

Example 3:

For example, lets assume that your father invested $5000 in his investment account and the value on the settlement date was $5400 and he indicated his will that you to receive proceeds of that investment from his estate (plan designation is not available for investment accounts). The financial institution will pay the $5400 to the estate and then estate will pay $5400 to you.  The $400.00 capital gain needs to be included in your father’s final return and $5400 will also be subject to probate fees (another complex topic). You will receive $5400 from the estate and it not taxable income to you.

Based on above scenarios, you will notice that there is no inheritance tax in Canada but your father may pay taxes on in his final return due deemed disposition of those assets and therefore the estate should have sufficient funds from other assets to pay those taxes.

Capital loss

I had to advise a friend on how to report capital loss. I thought of sharing that advice.

You incur capital loss when you sell your investments (stocks, mutual funds etc) for less than cost you bought it.  You capital loss can only applied to reduce capital gain and not any other income (there is exception capital loss in the year of death)

Let’s say you have a capital loss in 2010 for 15K and your capital gains for 2010 is 5K. Then your net capital loss is 10K. You have to apply to the current year gain before carrying back or carry forward the loss.

This can be carried back three years (2007, 2008 and 2009) or carried forward indefinitely. In order to apply to another year, you should have reported net capital gain in those years.  Lets say you have reported following capital gains in the prior years

2007 – 5K

2008 – 15K

2009 –10K

The allocation of capital loss will be based on your net income in the prior years. This way you will get higher refund.  For example if your income in 2008 is low and 2007 and 2009 high. Then the loss will be allocated to 2007 and 2009.  If you did not have any tax paid in the prior three years, it will be beneficial to carry forward the loss to future years.

The net loss 10K should be reported in the 2010 tax return and then if you are carrying back to prior years, you should complete a section III of  the T1A form  to apply the loss to the prior years.

Check CRA website for further information.