Are inheritances and gifts taxable in Canada?

Start with who owes the tax

Two different situations get called gifts and inheritances. In the first, someone gives you money or property while they are alive. In the second, you receive property because someone has died. In both, the question is not only whether the transfer is taxable but also who reports what, and in which year.

None of the CRA pages we reviewed on returns for someone who died, or on property you receive, describe a tax charged to you for simply receiving an inheritance or a personal gift. The tax events they describe are different: a deemed sale by the person who died, income from registered plans, income an estate earns, and the gain or income that arises after you hold the asset.

What happens on the final return

When a person dies, CRA treats them as having sold their capital property immediately before death, at fair market value, even though nothing was actually sold. Capital property includes real estate such as a home or cottage, investments and personal belongings such as artwork. Any resulting gain is reported on Schedule 3 of the final return, and the estate pays the tax from its assets before beneficiaries receive what remains.

There are exceptions. Property transferred to a surviving spouse or common-law partner who is a Canadian resident may not produce a gain or loss on the final return, provided it becomes locked in for that person within 36 months. The legal representative can elect out of that rollover property by property. A home that qualifies as a principal residence may be fully or partly exempt, but the designation still has to be made on the final return using Form T1255. Our article on filing a final return covers the process in detail.

The legal representative is also responsible for paying the tax owed before distributing the estate. CRA says a representative who distributes assets without a clearance certificate can be personally liable for unpaid amounts, so ask the executor whether one has been requested before you assume the money is final.

RRSPs, RRIFs and TFSAs are different

Registered plans are the main place where an inheritance can still be taxable. For an unmatured RRSP, CRA generally treats the person who died as having received the full fair market value of the plan immediately before death, and that amount is included in income on the final return. A RRIF follows a similar pattern, with the fair market value generally included unless an exception applies.

The main exception is a plan left to a surviving spouse or common-law partner, which can often be transferred without the full amount being taxed on the final return. CRA also describes a special rollover to the registered disability savings plan of a child or grandchild who was financially dependent on the person because of a physical or mental impairment. The details depend on the plan contract, the will and the form of the transfer, so confirm the beneficiary designation with the plan issuer and the estate’s accountant.

A TFSA is treated differently. CRA’s guidance says no income should be reported on the final return for the TFSA’s value at death. Growth that accrues after death is generally taxable to the beneficiary, so ask the issuer how post-death earnings will be reported. If a registered plan grows between death and final payout, that increase is generally included in the income of the beneficiary or the estate for the year it is paid.

Your cost for inherited property

If you inherit capital property, its cost to you is generally the deceased person’s deemed proceeds, which is usually the fair market value just before death. That figure, not what the deceased paid decades ago, becomes the starting point if you sell. The spousal and farm-property exceptions can change the amount, and CRA directs readers to its pages on returns for someone who died to find which rules apply.

Here is an illustrative example with round numbers. A parent paid $100,000 for a cottage that is worth $400,000 at death. The final return shows a deemed gain of $300,000, subject to any exemption or rollover. You inherit it with a cost of $400,000. If you later sell it for $430,000, the gain on your return is generally $30,000 before selling costs. Our article on selling a second property explains the reporting.

CRA’s examples use a 50 percent inclusion rate. The proposed increase to two-thirds was cancelled, but confirm the current rate when you sell. Keep the appraisal or other evidence of value at the date of death, because CRA tells people to record the fair market value on the date they inherit property.

Gifts while the giver is alive

CRA’s capital gains guidance deals with gifts of property, and the pages we reviewed describe no tax result for the giver or the recipient on a gift of money itself. A gift of property is different. CRA says that if you give capital property, you are considered to have sold it at fair market value when you give it, and any gain goes on your return for that year. The person who receives it generally acquires it at fair market value on the date they receive it.

Transfers to a spouse or common-law partner follow a separate rule. You generally have no gain or loss when you give capital property to a spouse or partner, and they are considered to have acquired it at the same amount you are considered to have received. If that person sells it during your lifetime, you usually have to report the gain or loss in certain circumstances. These attribution-style rules also matter when you give money to family to invest, which our income-splitting article introduces.

Income after you receive it, and foreign property

The money you receive may not be taxable, but what it earns afterwards generally is. Interest, dividends, rental income and gains on inherited investments belong on your return once the assets are yours. Track the date you received the assets so your accountant can separate any estate income reported on a T3 from income you earned yourself.

If you inherit or receive property outside Canada, a separate filing duty may apply. CRA says Canadian resident individuals who owned specified foreign property costing more than $100,000 at any time in the year must file Form T1135. The filing duty applies even when no tax is owing, and it carries penalties if it is missed. Ask how the cost should be measured for inherited or gifted property before you file.

Owner-managed businesses and family money

If you own a corporation, keep family gifts out of the company’s books unless the accounting is clear. Money a parent gives you personally is different from money you put into the corporation, and both are different from money the corporation pays to you. The first is a personal matter. The second may be a shareholder loan or share capital, and the third may be salary, a dividend or a loan. Mixing them can create a shareholder loan problem that is hard to untangle at year-end.

If you inherit shares of a private company, the deemed sale on the final return can be large and the shares may be hard to value. Bring the share register, the latest financial statements and any valuation to the estate’s accountant early.

What to bring to a conversation

Ask the executor for the final return, any T3 return, the T4RSP, T4RIF or other slips, the valuation of property at death and the clearance certificate, if one has been issued. For gifts, keep the date, the amount or value, the relationship to the giver and the written explanation of whether the money is a gift or a loan.

Discuss two things with an accountant before you sell inherited property or move gifted money into an investment account: your cost and the year the income will be reported. Sora’s personal tax service can help organize this information for your return. We cannot tell you the answer for your estate without reviewing the documents.