# Question about receiving an Inheritance



## newfoundlander61 (Feb 6, 2011)

With the recent passing of my mother, it appears that myself and sibilings will be receiving an inheritance. Do I need to enter the amount received on my yearly income tax and are taxes payable by me on the amount I receive. Or Are any taxes payable paid prior to us receiving our portion.


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## sags (May 15, 2010)

It depends on what is involved in the estate, and where the money is derived from, and varies from Province to Province.

If there is land, investments, or a considerable amount of money involved...........the estate would have to pass through probate. Often the banks will demand "letters of probate" to prove the executor has the legal right to control the money.

The executor would secure all the assets, pay all the estate debts, pay the income tax due, and distribute the inheritance according to the will.

The estate should pay all the taxes due, prior to disbursement to the heirs, and there should be no taxes due from you.

Unless.........there is land or property involved. In that case......fair market value for the asset would be determined by the executor and taxes paid from the estate on that value,...........but from the date of the "fair market value assessment" to the date of selling the property, the asset may have grown in value and you would be responsible for the taxes on the growth in value.

If it is straight cash to you..........from insurance policies or cash in the bank, then you don't have to declare it or pay taxes on it.


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## Xoron (Jun 22, 2010)

sags said:


> If it is straight cash to you..........from insurance policies or cash in the bank, then you don't have to declare it or pay taxes on it.


No matter what is left, you as the recipient of the inheritance pays no tax. 

The estate of your mother pays:
1. Probate taxes (in Ontario, not sure what they are in other provinces). This is a flat tax on the total net worth of your mother at the time of her death.
2. Capital gains on increased value of any investments (stocks, rental properties, gold coins...)

Once the estate is "settled", and all creditors have been paid, then the estate can pay out any inheritance from the remaining amount. Note that there are no capital gains on the primary residence (if she owned her own house).


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## newfoundlander61 (Feb 6, 2011)

Thankyou both, its from a home she owned and the land its own. Never in this situation before.


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## atrp2biz (Sep 22, 2010)

I am in a similar situation. What about as a beneficiary of a pension payout? I recently received a payout with withholding taxes taken out. The payout included a letter indicating they would be sending a T4A. If the withholding tax is less than my marginal tax, I would imagine I would have to pay the difference?


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## heyjude (May 16, 2009)

newfoundlander61 said:


> Thankyou both, its from a home she owned and the land its own. Never in this situation before.


Condolences on the death of your mother. Probate will certainly be required if there is property involved. If your mother's will stipulates that the property is to be sold, that must take place before the estate is settled. When the dust settles and all the taxes and bills have been paid, the money in the estate will be divided up according to your mother's wishes in her will. If she left the property to you and your siblings jointly, I suppose you have the option to buy each other out, but that is more complicated. However, I don't believe you would pay any taxes. My understanding is that even if someone dies with a large unpaid tax bill which exceeds the funds in the estate, the beneficiaries are not liable to pay the taxes. But I am not a lawyer and I could be wrong.


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## wendi1 (Oct 2, 2013)

If the executor applies for the CPP death benefit ($2500) there will be tax payable on that, either by the estate on the final tax return, or by one or more of the beneficiaries. 

But my experience is that the estate pays probate and capital gains taxes, if required, and no tax other tax is payable by the beneficiaries. 

Incidently, the winding up of the estate will go much more smoothly if the executor is in the same province as your mother was. And MUCH more smoothly if the executor is one person (not all the siblings equally), or a trust company. I performed this task for both my parents, and there was a long and frustrating learning curve associated with it (especially the final taxes).

Usually, it will take some time to sell the house and dispose of the assets, then there will be a preliminary distribution of the inheritance (this will take about a year, unless there is something unusual). Then the executor will apply to CRA for a "clearance certificate", which essentially means that CRA waives their right to challenge the last seven years of income taxes. When the final clearance certificate is received, the executor will distribute the rest of the inheritance. Sometimes the executor takes a cut of the inheritance - up to 5% in Ontario (and certainly should take enough to cover expenses, which there will be).

I am sorry, I have no experience with pension payouts - you will have to ask someone who knows.


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## Xoron (Jun 22, 2010)

atrp2biz said:


> I am in a similar situation. What about as a beneficiary of a pension payout? I recently received a payout with withholding taxes taken out. The payout included a letter indicating they would be sending a T4A. If the withholding tax is less than my marginal tax, I would imagine I would have to pay the difference?


Pretty sure it would be taxed as income to the estate. So if there weren't enough taxes withheld for the filing year, then the estate may still owe more.


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## newfoundlander61 (Feb 6, 2011)

Thanks for the kind remarks and input, much appreciated.


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## sags (May 15, 2010)

This question wouldn't apply to a principal residence.

If the executor distributes assets only "after" they receive the Final Tax Certificate, how do they handle a situation where the asset went up in value while held within the estate?

This is an excerpt from the CRA, for what has to be provided on the application for a Final Tax Certificate.

_a statement showing the list of assets and distribution plan, including a description of each asset, adjusted cost base, and *the fair market value at the date of death and at the date of distribution, if not at the same time*. Also include the names, addresses, and social insurance numbers or account numbers of the recipients and his or her relationship to the deceased. If a statement of properties has been prepared for a probate court, we will usually accept a copy, and a list of any properties that the deceased owned before death and that passed directly to beneficiaries;_

We recently inherited some farmland that has been in probate for over 3 years. Since the date the "fair market value" was determined, the land has increased in value by 30% or more.

We are selling the land, and I expect we will have to report capital gains on the difference between the fair market price assessed during probate and the actual selling price.

Is that accurate?


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## wendi1 (Oct 2, 2013)

Yes, tax will have to be paid if there are capital gains (or interest payments, for that matter) between the time of death and the time of distribution, but usually by the estate.

In fact, I (as executor, for the estate) had to pay tax on the income from a TFSA that took some time to wind down.

The executor usually distributes the bulk of the estate after the "Interim Tax Certificate" is received, keeping back enough money to cover anticipated CRA requests. For simplicity, the remaining money is often kept in a non-interest bearing account.

So in your case, Sags, the executor(s) would sell the land, put the money in the estate account, apply for an Interim Tax Certificate, make a distribution, apply for a Final Tax Certificate, distribute the remaining money, close the estate account. The executor would also file and pay taxes each year on behalf of the estate. 

CRA would only go after the beneficiaries if the estate had not been filing tax returns - but then the clearances would not be issued, anyways.

As I said - a long and frustrating learning curve...


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