Over the course of the next decade one of the largest wealth transfers in Canadian history will take place as Baby Boomers pass down their wealth to their children and grandchildren. You will likely have some friends and family who will benefit from this wealth transfer; however, as assets and cash are passed down the Canadian Revenue Agency (CRA) has an entitlement to their fair share of tax – and we need to be aware of the responsibilities that are owed to the CRA in the case of an inheritance.
As a Licensed Insolvency Trustee I come across inheritance situations like these, and the most important piece of advice I can offer is that CRA will always get paid – so be careful how you spend your inheritance, and always get the proper tax advice and set aside what the CRA will come asking for.
Here’s an example of where things get confusing for many of the people I meet: let’s say that you are the beneficiary of an RRSP or RRIF that your grandfather has left you upon his passing. In some circumstances the RRSP/RRIF proceeds will be paid to you directly by the bank, in other situations it is the insurance company that makes the payment. In both instances the bank or insurance company may deduct some tax, but in some cases, the amount may not be enough. In situations like this the question is often focused on who is responsible for paying the balance of the tax, is it the Estate or is it you as the beneficiary?
If we push this example a little further it gets more complex: let’s say that you receive RRSP proceeds, but your sibling receives the same value in real property. If there is tax owing that directly relates to the RRSP, can CRA go after you and your sibling to collect?
The answer is complex and there are many factors at play. CRA has mechanisms in place to assess related parties who have received property of a person that owes tax, so in this case either you or your sibling may be on the hook for a sizeable tax bill.
In the case of an inheritance it is critical to be careful and get the right legal and tax advice so that you are not burdened with any unexpected liabilities associated with your inheritance.
There are many specialty professionals who are trained to handle these situations and I always encourage my clients, friends, and family to work with. If you need a referral, please reach out to me so I can put you in touch with the right advisors to keep you properly informed of your tax responsibilities.
Or, better yet, let’s set up an appointment and sit down so we can go over your specific questions and needs.