Are you banking on receiving an inheritance in Canada? Or maybe you’ve recently received an inheritance? You’re one of the 60% of Canadians who expect to receive one. On average, Canadians will receive $100,000 or so in inheritance value, with British Columbians receiving the higher end and Maritime citizens receiving the lower end.
But receiving an inheritance in Canada isn’t so cut and dry. Plus, things get dicey if a deceased person doesn’t leave a formal, legitimate will. Yes, you don’t have to pay an inheritance tax — but the process still results in some taxation regardless. While Canada doesn’t have a set of federal laws for inheritance and estates, the nitty-gritty is decided by province.
In this guide, we’ll cover the ins and outs of receiving an inheritance in Canada, including the process, limitations, tax obligations, and steps to protect your inheritance. Continue reading to learn more.
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Inheritance law in Canada
Inheritance isn’t as easy as an e-transfer after someone dies. Canada’s inheritance laws dictate a strict process to be followed upon someone’s death. This process can take a few months, sometimes even years, to execute. Let’s take a closer look below.
How does inheritance work in Canada
The heir to a deceased person’s inheritance is called a beneficiary. The person who distributes a deceased person’s assets is called an executor, often appointed by the deceased according to their will. Executors are also a part of the overall legal proceedings when carrying out the wishes of a will. Once someone dies, their executor must file a final return for their estate, which declares income and implies subsequent tax obligations for:
- Employment income
- Self-employment income
- Pension benefits
- Capital gains on property
- Employment insurance
- Registered Retirement Savings Plan (RRSP) income
- Registered Disability Savings Plan (RDSP) income
- Other types of income, deductions and tax credits
Once the estate’s final return is filed and the taxes are paid, only then can the executor disperse inheritances to the beneficiaries. But if a beneficiary feels they’re entitled to a part of an inheritance that they haven’t yet received, they don’t have forever to make a claim. Enter the statute of limitations.
Statute of Limitations
Ontario’s Limitations Act, 2002 describes a general statute of limitations as two years. However, the Act reminds citizens to refer to specific statutes of limitations in more relevant legislation, which trump the Limitations Act. In this case, we check the Succession Reform Act, which names the statute of limitations as six months. Keep in mind this is just Ontario as an example, each province and territory has its own statutes of limitations and respective laws.
Ideally, a will should take care of a deceased person’s wishes with regards to inheritances for dependents and other beneficiaries. However, that’s not always the case. For example, a deceased person’s son might make a claim to an inheritance if he isn’t named in the will, or if there’s no will altogether. The duration of time that someone can make such a claim varies by province and territory. But essentially a statute of limitation states the maximum amount of time someone can take to proceed with legal action. Still, special circumstances might encourage the courts to allow claims beyond the statute of limitations.
Related Reading: How Inheritance Works in Canada
How do Canadian inheritance tax laws work?
Inheritance helps families retain generational wealth — but not if you slack on reading up on inheritance tax laws. After all, you have to understand the laws in order to use them to your advantage. A seemingly routine asset transfer can hit you with a tax bill that depletes your heirs’ inheritance. To avoid that, we’ll cover laws and tax obligations when receiving an inheritance in Canada in the next section.
Who can inherit when there is no will?
Inheritance without a will is known as intestate succession. Bottom line? You lose a lot of autonomy if you have no will at the time of your death. In other words, your estate will be distributed according to local laws, as opposed to your personal wishes.
The Ontario government has special provisions in the Succession Law Reform Act, 1990, for intestate succession. For example, a surviving spouse will inherit everything if there are no other children. In the case of children, the surviving spouse and child or children will receive an equal share of the inheritance.
So if you’re estranged from your daughter and your son helped carry on your business? Both will inherit the same value regardless. The courts appoint a representative on your behalf to disperse your estate assets according to the Act. Meaning? You can’t pick your own executor. While they act in what the government feels is your best interest, it might not actually be. You can’t decide who gets every dollar, which is disappointing since we’re talking about your entire life’s assets and savings. And remember, this is just an example of Ontario. Each province and territory will have it’s own respective interstate succession.
Apart from personal preferences, dying without a will also eats up more of your estate. Dying without a will and no executor for your estate steals your opportunity to minimize your tax burden.
The best way to avoid this? Start writing your will early. Some experts even advocate first drafts at 18 and consistent updates throughout your life.
Related Reading: Will Planning Guide Canada
Is there an inheritance tax?
When receiving an inheritance in Canada, you might assume a special tax applies. Luckily, Canada doesn’t have an official inheritance tax like other places in the world, such as Pennsylvania, Iowa, and Nebraska, among others.
However, no inheritance tax doesn’t mean receiving an inheritance in Canada is tax-free. Before an heir receives an inheritance, the deceased person already pays tax from their estate in their final return. In other words, a beneficiary’s inheritance can be reduced as a part of the final tax return, but beneficiaries themselves will not owe tax.
Do you have to claim inheritance as income in Canada?
No, you don’t have to report inheritance on your taxes in Canada. As mentioned, the deceased person’s executor already would have filed their final return on the estate. At this time, taxes are paid — meaning an heir doesn’t have to pay tax on the inheritance again. This would result in double taxation which is why there’s no tax for the beneficiary.
Can the Canadian Government take your inheritance?
Sort of. The Canadian government can’t take your inheritance right off the bat. However, they can deplete it before you receive it through the estate’s final tax return, sometimes even through probate. Of course, you could argue that if you owe any taxes or declare bankruptcy, your creditors and the CRA could technically access your inheritance as it’s now considered part of your estate.
Fortunately, debt does die with you in Canada, but that doesn’t stop creditors from attempting to make a claim from the estate (both the CRA and other debtors). Often, a well planned will contains details about how debt will be managed so family members, loved ones and beneficiaries don’t have to deal with creditors seeking payment after death.
Related Reading: Estate Planning in Canada: A Checklist
What happens when you receive an inheritance?
How do you inherit part of your parents’ or another deceased person’s estate? Here’s the process for receiving an inheritance in Canada.
If you’re named in a deceased person’s will, you’ll receive however much is allocated to you as a beneficiary. It may be split with others named in the will. The executor will make sure you receive the amount the deceased person wished for you, save for any taxes that come from the estate’s final return. This process can take some time due to the slow wheels of justice, so be patient!
How long does it take to get inheritance money in Canada?
The average wait time for receiving an inheritance in Canada is 3 to 6 months. However, that doesn’t account for any complications. For example, if the deceased person doesn’t leave a will, the government representative responsible for disbursement could take a bit longer to execute.
Moreover, any contests to the will add on more time waiting before receiving an inheritance in Canada. In some cases, dependents might disagree about their parents’ wishes and file a claim for more of an inheritance. These familial arguments can add years of time before you actually receive any money.
What is the average inheritance in Canada?
In Canada, the average inheritance is about $100,000. Although, it varies from province to province and territory to territory. Some regions of Canada contain more wealth than others which reflects in inheritances.
Related Reading: How long does it take to receive inheritance from a will Canada?
What can you do with your inheritance?
Luckily, you don’t have to pay any income taxes on your inheritance because your parent or whoever died already paid them from their estate. Still, you might have a large chunk of change to manage. Certified financial planner Jason Heath advises beneficiaries to slow down, and not to rush in making any decisions. He reminds us that six months of an inheritance sitting in an account won’t make or break you financially. The last thing you want is to squander what your parents’ worked all their lives to provide you with. Here are two things you should do after receiving an inheritance in Canada.
Hire an expert
You might consult a financial planner or an independent wealth management firm for heftier inheritances. Sometimes a large inheritance can be a lot to handle and seeking professional help can prevent you from making poor monetary decisions. These professionals can help you strategize saving schedules, investment choices, and general ways to protect your inheritance. If you’re dealing with any shared assets, such as a property shared with your brother or sister, you may consult a lawyer to discuss next steps if one of you doesn’t want to keep the property.
Invest
Cash savings lose so much value over time with inflation. That’s why investing a cash inheritance is always better than letting it sit in the bank. Even in a savings account, the interest accumulated is minimal compared to the value retention through investing. You might explore stocks, mutual funds, cryptocurrency, real estate, metals, or any other sort of security or investment. Alternatively, you might invest in education or starting a business if you never had the financial means to before. Whatever you choose to invest in, just be sure it adds value to your life and will help you retain wealth!
Related Reading: How to Manage Sudden Wealth
Protecting your inheritance
Receiving an inheritance in Canada is a pretty straightforward process when a will is in place. However, you’re still tasked with managing and protecting the value of your inheritance when you receive it. They say wealth dissipates after three generations — but you can combat those stats by investing and consulting a wealth manager early. The generations before you worked hard to acquire their wealth, it’s wise to do everything you can to protect it!
Read More: Is inheritance money split in a divorce in Canada?