Receiving an Inheritance in Canada: What to Do Next?

Receiving an inheritance can be both a blessing and a burden. Whether it comes unexpectedly or as part of a long-anticipated estate plan, a significant windfall brings both financial opportunities and important decisions. In Canada, how you manage an inheritance can significantly affect your long-term financial well-being. Here’s a practical guide on how to navigate this life event.

Pause Before Making Decisions

Grief can cloud judgment, and inheritances often follow the loss of a loved one. Take time to process emotionally before making major financial decisions. There’s no rush – assets like real estate, investment accounts, or cash will generally be there when you’re ready.

Understand the Tax Implications

In Canada, inheritances are not taxed as income. Generally, that means you won’t owe tax simply for receiving money, property, or investments from an estate. The exception to this may be for registered plans (TFSA’s/RRSP’s) where you are a directly named beneficiary and the portfolio has gained in value between the date of death and distribution to the beneficiaries. A spouse or dependent child may be named as a successor holder, negating the tax, but all other beneficiaries will be issued a T4A slip that reports their respective portion of these gains and must be declared on your tax return. In most cases however, this should be minimal.

Do keep in mind however that there can be tax consequences on the deceased person’s final return so the value at the deceased person’s date of death may not accurately represent the actual inheritance you will receive. For example:

Capital Gains: The estate may owe tax on the deemed disposition of assets like cottages, investment properties, or non-registered investments.
RRSPs and RRIFs: These are fully taxable in the hands of the deceased unless rolled over to a spouse or dependent child.

While you personally may not owe tax, it’s still wise to speak with the executor and/or accountant handling the estate to understand the full picture.

Pay Off Debts Strategically

Many Canadians consider using an inheritance to eliminate debt. That can be a great decision but prioritize paying off debt based on interest rates and financial flexibility. For example:

High-interest consumer debt (like credit cards) should be addressed first.
Mortgage debt may be worth paying down, depending on your rates and other investment opportunities.
Consider keeping some liquidity for flexibility and emergencies.

Assemble a Financial Team

Dealing with an inheritance, especially if it is large, can be complex. Consider assembling a professional team to help guide you:

Wealth Advisor: To create a long-term investment / wealth planning strategy that aligns with your goals and build a Financial Plan to act as your financial roadmap.
Tax Professional: To advise on how to structure your investments and minimize taxes.
Estate Lawyer: Especially if you’ve inherited property, shares in a private company, or if you plan to gift or pass assets on in the future.

Review and Update Your Financial Plan

An inheritance can be a turning point. It’s a chance to revisit your financial plan or create one if you haven’t yet. Your Wealth Advisor should be your key person in building your plan.

Given an influx of assets, your goals may change from what they were before receiving your inheritance. New considerations may include:

Increasing your retirement savings
Funding a child or grandchild’s education
Making charitable donations
Taking time off work or changing careers
Purchasing real estate or downsizing debt

Invest With Purpose

If your inheritance includes cash or the proceeds from selling other assets, you’ll need to decide how to invest it. Your Wealth Advisor will help you with the key considerations such as:

Time horizon: Are your goals short-term (within 5 years) or long-term (retirement, legacy)?
Risk tolerance: How comfortable are you with market fluctuations?
Tax efficiency: How to structure the inheritance and any existing investments to best minimize future tax. This may include the use of tax-sheltered accounts like FHSAs, RRSPs, TFSAs, or RESPs.

Avoid letting money sit idle in low-interest accounts unless you have a clear short-term purpose for it.

Protect and Plan for the Future

Now that you’ve received a significant asset, it’s time to think about protecting and preserving your wealth. Your will and power of attorney may need to be reviewed to ensure they reflect your new financial reality. Life and disability insurance needs should also be revisited. You may also want to discuss the benefits of a trust if you’re considering passing assets to children or managing a family legacy.

Be Cautious with Gifting or Lending

It’s natural to want to share your inheritance with family or friends but be cautious with gifts or informal loans. Once given, money is hard to get back, and personal relationships can become strained. Make sure your financial future is secure before you commit to helping others and ensure any gifts or loans are properly documented.

Final Thoughts

Receiving an inheritance is a unique moment that comes with emotion, responsibility, and opportunity. By taking a measured approach, seeking professional advice, and aligning your financial decisions with your personal goals, you can use this gift to build long-term security and create a legacy of your own.

If you’d like help navigating an inheritance and creating a personalized financial plan, consider speaking with our team of Wealth Advisors. We are here to work with you step by step to ensure you make your financial decisions with an informed and well thought out plan alongside you.