While Inheritance is Non-taxable, A Word of Caution
Inheritances are non-taxable for Canadian taxpayers regardless of whether or not the inheritance comes from a Canadian citizen or a foreign citizen. This non-taxable tax treatment is also consistent regardless of whether or not the inheritance is straight cash, a summer house, a rental building or shares of a company.
Before you become complacent, a word of caution! The non-taxable status of an inheritance doesn’t mean there aren’t any Canada Revenue Agency reporting obligations.
Inheritance Reporting Obligations
First of all, if your inheritance is coming from a foreign (i.e. non-Canadian) source, a completed T1135 Foreign Income Verification Statement may be required along with the personal tax return for the tax year the inheritance was received. The T1135 Foreign Income Verification Statement is an information return that Canadians are required to file when they own specified foreign property with a cost base of more than $100,000 in Canadian dollars. For example, if a taxpayer’s grandparents left them $1,000,000 worth of US cash in a US bank account, the Canadian beneficiary may be required to file a T1135, depending on how and when they took over legal ownership of the funds in their grandparents’ US bank account.
Selling Inherited Assets
Although the inheritance itself is not taxable, there will be tax implications when the beneficiary of the inheritance sells the inherited assets. This happens regardless of whether or not the assets are immovable assets located outside of Canada or publicly traded shares transferred into a Canadian trading account after the distribution of the estate assets. When the assets are sold, capital gains or losses would be calculated as the difference between the proceeds on the sale of and the cost base of the inherited assets. The first question that probably comes to everyone’s mind is “How do we know the cost base of these assets?” The general rule for determining the cost base is that when a Canadian taxpayer inherits or is gifted property, the cost of the assets for tax purposes is the fair market value of the assets on the date the beneficiary takes ownership of the assets, not on the date of death of the deceased – this is due to the fact that it could take time for the estate to distribute the assets themselves.
Interest & Dividends
Another important note to remember – any interest or dividends received during the period of ownership would be included on the beneficiary’s Canadian tax return, even if the investment income was earned outside of Canada.
The general rule is the inheritance is not taxable at first, but all income that flows from the inherited property is taxable.