What to Do When You Inherit Money in Canada

Three in ten Canadian homeowners had received an inheritance as of 2019, and by 2023 the median one was $85,100. For renters it was $29,800, according to Statistics Canada (opens in a new tab). Those are ordinary amounts, arriving at a bad time, and most of what’s written about inheritance in Canada is aimed at estates ten times the size.

Canada has no inheritance tax. You won’t report the money as income and you won’t send the CRA a form because you received it. What catches people out is the wait. The estate has to settle the deceased’s taxes before anything is handed out, and that can take a year or more.

Do you pay tax on an inheritance in Canada?

No. Canada has no inheritance tax and no estate tax. Money or property you receive from an estate isn’t income, so it doesn’t go on your return and there’s nothing to report. The tax triggered by a death is paid by the estate, out of the estate, before anything is handed out.

What the estate settles first

When someone dies, the CRA treats them as having disposed of their capital property immediately before death at fair market value (opens in a new tab). Nothing was sold, but the capital gains are real, and they go on the deceased’s final return. A cottage bought in 1991 can produce a tax bill large enough to change what everyone receives.

There’s one big exception. Capital property left to a spouse or common-law partner who lives in Canada can transfer at its original cost instead, which postpones the gain until the survivor sells or is deemed to sell it.

Registered plans are the other place estates shrink. The CRA generally counts the full value of an RRSP on the date of death as income on the final return, which can push a modest estate into the top bracket for a single year. A qualifying survivor (opens in a new tab), such as a spouse, common-law partner, or a financially dependent child or grandchild, can receive it as a refund of premiums and defer that. Anyone else, and the estate pays.

So read the account statements as a rough guide. What arrives is what survives the final return.

What you owe once it’s yours

Nothing on receipt. From then on, though, whatever the money earns is ordinary income to you. Interest in a savings account gets reported the same way interest always does, and dividends and capital gains follow their own rules.

The TFSA works a little differently. A designated beneficiary (opens in a new tab) doesn’t pay tax on the value of the account as of the date of death. Growth after that date is a different matter, and depending on how the TFSA was set up, it’s taxable to whoever receives it.

How long does it take to receive an inheritance?

Usually a year, often more. The executor has to locate the assets, pay the debts, file the deceased’s final return, and in most cases get a clearance certificate from the CRA before distributing anything. The CRA sends an acknowledgement within 45 days of a clearance request and can take up to 120 days to assess it, longer if there’s an audit.

The clearance certificate is the slow part

A clearance certificate (opens in a new tab) confirms the estate has paid all its income tax, GST/HST, interest and penalties. Executors wait for it because of what happens if they don’t. Distribute the money while tax is still owing and the executor is “personally liable for unpaid amounts, up to the value of the amount of assets distributed.” So an executor who seems slow is usually protecting themselves, and the estate, from a bill that would otherwise land on them personally.

You may not have to wait for all of it

Plenty of executors release part of the estate early and hold back a reserve for the tax. If you’re waiting on money you need, ask whether a partial distribution is possible rather than assuming the whole thing is frozen until the certificate arrives.

What does probate cost, and who pays it?

The estate pays, not you, and the amount depends entirely on the province. On a $500,000 estate it’s $525 in Alberta and $6,750 in Ontario. Quebec charges nothing at all when the will was drawn up by a notary. The fee comes off the top, before anything is divided.

Ontario stopped taxing the first $50,000 of an estate on January 1, 2020. Before that the first slice was taxed at $5 per $1,000, and pages written back then still show the old rate. Check the date on anything you read, or work from the province’s own page.

What should you do with an inheritance?

Nothing, for the first few months. Put it somewhere safe and dull, tell only the people who need to know, and let the decision wait until you aren’t grieving. After that the order is boring and it works: high-interest debt, then a cash cushion, then registered accounts, then whatever the money was meant for.

Give yourself a decision-free window

Three months is a reasonable rule and nobody will argue with you for taking it. Grief makes people generous, impulsive, or both, and the requests tend to arrive early. Nothing you could buy in month one gets worse if you buy it in month four.

If it helps to have a line ready, “the estate isn’t settled yet” is true for longer than most people expect.

Where to park it while you decide

A high-interest savings account is the usual answer, at your own bank or an online one. If you have contribution room, a TFSA shelters the interest as you go. For a large amount, check the deposit insurance limit at each institution rather than putting everything in one place.

What matters here is that you can get at it quickly and it isn’t at risk. You’re parking the money, not deciding anything yet.

Then work down the list

1. Credit cards and anything above roughly 10%. Clearing a 21% balance is a guaranteed 21% return, which no account will beat. If you’re weighing debt against saving, we’ve gone through the order in detail.
2. Three to six months of expenses in cash. An emergency fund is the difference between the next surprise being annoying and being a crisis.
3. Registered room. TFSA, RRSP or FHSA, depending on your income and what you’re saving for.
4. The thing it was for. A down payment, a mortgage, tuition, a break. This part is allowed to be personal.

The mistakes that cost the most

Leaving it in chequing “for now.” Money in a chequing account gets spent in pieces, and nobody can point to where it went. Move it the week it arrives, even if you have no plan yet.

Lending to family on a handshake. Word travels, and the requests are usually sincere. Write down the amount and the terms, or treat it as a gift and expect nothing back. It’s the half-measure in between that causes trouble.

Buying the big thing first. A car, a renovation, a boat. These are easy to commit to in month one and hard to undo in month six.

Taking advice from someone paid on what you buy. Ask how the person in front of you is compensated. It’s a fair question, and the answer tells you most of what you need to know.

Forgetting the tax on what it earns. The inheritance isn’t taxed. The interest, dividends and gains that come after are, and the first bill arrives the following April.

The part you’re not touching yet

Most of an inheritance ends up sitting still. The emergency cushion, the down-payment money, the money you haven’t decided about yet. It earns whatever your bank pays and there’s no reason to look at it from one month to the next.

Lodavo is a free Canadian app that gives you a ticket in a weekly cash draw for every $25 you have saved. Your money stays in your own account, so nothing changes about where you keep it or what it pays. Somebody wins at least $100 every week, and the biggest prize is $10,000. If part of this money is going to sit still for a while, this gives you a reason to check on it.

Before you decide anything

An inheritance is money you didn’t plan for, and it arrives in a month when you’d rather not decide anything. The tax part is simple, the waiting part is slow, and every other decision will still be there in three months.

If you want the part that’s sitting still to be worth something more than interest, download Lodavo free on the Apple App Store (opens in a new tab) or the Google Play Store (opens in a new tab) and start collecting tickets for the weekly draw.

This article is general information, not tax or legal advice. Estates differ enormously, and how a particular one is taxed depends on the assets in it, so talk to an accountant or an estate lawyer about your own situation.

Terms and conditions apply. No purchase necessary (alternate method of entry available). Skill-testing question required. Open to legal residents of Canada who are the age of majority. Odds depend on the number of eligible entries received. Full rules and odds at our contest rules.