You inherit some investments
Should you hold on to them?
It all depends on their value and return, as well as the tax implications for you. The latter will depend on your relationship to the deceased, e.g., if you are a spouse, child or third party.
If the investments are bequeathed to a spouse, there is a tax-free direct rollover of the investment to the spouse. The same applies to RRSPs.
Child or third party
If the bequest is made to a child or third party, the investment is deemed to have been disposed of at its fair market value. In other words, for tax purposes, the security is considered sold at the time of death. A new tax cost is then calculated, the “adjusted cost base”. If the heir elects to keep the investment, this becomes the purchase price, which is later used to calculate the capital gain.
Choosing to sell or hold on to an investment
Here is an example to illustrate the issues involved.
Jean-Pierre inherits 500 shares that his father purchased at $16 per share, for an initial cost of $8,000, excluding commissions.
When his father died, the shares were worth $22. For tax purposes, these shares cost Jean-Pierre $22. The capital gain must be reported on the deceased’s income tax return, i.e. $6 per share, which will be taxed at 50%.
Jean-Pierre has two options: Sell the shares right away or keep them. If he sells them at $22, there will be no taxable capital gain. If he keeps them and later sells them at $30, he will have to declare a capital gain of $8 per share ($30 – $22 = $8), which is taxable at 50%.
Did you know?
If you inherit a large investment portfolio and are unsure as to how to manage it, you can turn to experts in the field for help.
You inherit property
The tax implications of inheriting property depend on the status of the property and your relationship to the deceased.
Type of property
A dwelling designated as a principal residence is not taxed.
Income property or cottage
- The tax implication for a bequeathed income property or a cottage will affect the deceased, not the heirs.
- When declaring the deceased’s income when settling the estate, you must take into consideration capital losses/gains, as well as the recovery of depreciation accrued by the deceased on income property. Throughout his/her life, the deceased may have used depreciation each year to reduce income from a property and decrease his/her income tax. At the time of sale of the property or the death of the owner, the government recovers this unearned tax advantage. The amount is added to any capital gains and taxed.
- The one exception is when a spouse inherits a secondary residence or income property – then there is an automatic rollover (transfer) of the property with no immediate tax implications for anyone.