Do You Have to Report Inheritance Money to the CRA?

What Does the CRA Consider Inheritance Money?

In general, the CRA doesn’t consider money or assets you inherited as taxable income, which means that you don’t have to report it.

If you received $100,000 cash from your grandmother after she passed away, you don’t need to add this to your tax return that year and report it as income. This is because your grandmother’s estate is responsible for paying any taxes owed before the estate goes to beneficiaries. 

You can think of this money from your grandmother as a gift given after her estate’s final tax return is filed. As an individual in Canada, your taxable income is income you as an individual earned. 

Written By Tiffany Woodfield, Financial Advisor, TEP®, CRPC®, CIM®

Key Insights

• Inherited money is generally not taxable and does not need reporting to the CRA.
• The deceased’s estate pays applicable taxes before beneficiaries receive an inheritance.
• Capital gains can be triggered at death and reported on the final tax return of the deceased. 
• Future income earned from inherited assets must be reported on your tax return.
• Complex estates may require professional planning to reduce taxes and avoid mistakes.

Do You Have to Report Inherited Money to the CRA?

You generally don’t need to report inherited money to the CRA because the tax liability was paid by the original estate.  

However, future income from the inherited money will need to be reported on your personal tax return. For example, if you invested the $100,000 you received from your grandmother and it earned interest or dividends or realized a capital gain, this would need to be included on your tax return. So once you “own” the money, any income is now reportable to you.  

When Do Taxes Apply Before You Receive an Inheritance?

Taxes apply before you receive the inheritance. 

For example, your grandmother’s estate would need to handle the taxes before any distributions are made. This includes any capital gains at death and final tax returns.

Capital Gains Are Triggered at Death

When you pass away, the CRA considers all of your capital assets to have been sold at the fair market value (FMV) on the day of your death.  

Although no assets have necessarily been sold, it is as if you sold them, and any resulting capital gains are taxable. For example, let’s say when your grandmother passed away, she had $1,000,000 in a non-registered investment portfolio.  

For simplicity, let’s say the original cost on this portfolio was $500,000. Fifty percent of the capital gain is $250,000 and would be added to your grandmother’s final estate tax return as earned income. 

Capital gains taxes can be triggered at death by a vacation property, investments, and other capital assets that have increased in value.

Final Tax Return and Estate Filings

The executor is responsible for filing a T1 Final Tax return and reporting all income and capital gains that were triggered when the deceased passed away.  

In addition, if the estate continues to earn new income before the assets are distributed, the executor will need to file an annual Trust Return. It is critical for the executor to get a CRA Clearance Certificate confirming all tax liabilities have been paid before distributing the inheritance. Otherwise, the executor could be personally liable for any unpaid taxes for the estate.

When Can Inherited Assets Create Ongoing Tax or Reporting?

Inherited assets can create ongoing tax reporting when the inherited money earns income or results in capital gains.  

For example, say you inherited a cottage and used it as a rental property. You would need to report this income on your personal tax return each year. In addition, if you sold the cottage in the future and it had a large capital gain, this would also need to be included on your tax return.  

Finally, if you inherited foreign funds or property, you may be required to file annual disclosures.

When Should Higher Net Worth Canadians Get Advice?

• HNW individuals who have multi-million dollar portfolios because the recent capital gains inclusion rate further adds to the cost of liquidating or transferring an estate.
• HNW individuals with corporations because inheriting shares of a private Canadian corporation can result in double taxation if proper planning isn’t in place.
• HNW individuals with family trusts because of the 21-year rule and the strategies available during your lifetime.
• HNW individuals with cross-border exposure because when you have assets and/or beneficiaries in multiple jurisdictions, the risk of double taxation increases dramatically.

In all of the above situations, proper planning with legal and tax experts can create peace of mind and save you significantly in taxes and headaches.

Get the Money Secrets Letter

Pop your email address in the form below to get my easy checklist and guide to manifesting and the guided audio meditation to help you get started.

You’ll also get one or two emails per month with the latest blog posts about abundance, wealth-building, manifesting, estate and legacy planning, generational wealth, and creating a fulfilling life.

Read More:

💎 What Assets Should Not Be Put Into a Trust in Canada?

💎 Is There Inheritance Tax in BC?

💎 Do You Pay Tax on an Inheritance in BC?

About the Author

Resources:

Are Gifts Taxable in Canada?