When you receive assets from your parents that come from their estate, this is considered a taxable event. It may seem like there are no taxes due on the purchases you receive if your parents were exempt from income tax, but this is not the case. If your parents’ estate is valued over the exclusion amount, you’ll have to pay income tax on the assets you receive.
How Inheritance can Be Taxed
1. Exclusion Amount
You can receive $11,000 per person without paying income tax on the inheritance. You will have to pay tax on any amount above this exclusion amount. For example, if your parents’ estate is valued at $2 million and you receive one-third of this upon their death, you’ll have to pay taxes on $600,000 because it is over the exclusion amount.
- Exclusion Amount = $11,000 per person
- $11,000 x 2 = $22,000
- $22,000 is over the exclusion amount.
You will have to pay tax on the amount over the exclusion amount.
2. Recipient Allowance Exemption Amounts
In addition to the exclusion amount, your family exemption will reduce your taxable income. However, you can only deduct your spouse’s or common-law partner’s and a dependent’s expenses up to their basic personal exemption amount. These essential personal exemption amounts are included as income on Schedule 1 of your T1. You can also claim up to $3,400 per person in expenses you incurred for yourself to reduce the value of your taxable income.
- Essential personal exemption amounts:
- Spouse: $11,000 dependent: $5,400
- Example: Joe is married to Tammy, and they have two children and is a salaried employee earning $80,000 per year. Their basic personal exemption amount is $15,000.
3. Exclusion amounts of trusts and registered retirement income funds (RRSPs)
Under certain conditions, your estates can be added to a trust or RRSP to receive your inheritance tax-free. However, the total value of all taxable property you received from one or more trusts and RRSPs must be, at most, the exemption amount.
If your Inheritance is bequeathed to you in the form of a trust or an RRSP, make sure to seek the advice of a financial planner or accountant. They can determine whether accepting your Inheritance in this manner will be more beneficial than receiving it as cash.
4. Deductions from the value of certain assets
The value of certain assets, such as capital property and inventory, is deducted from their total value before calculating the tax payable on these assets. You can also remove a capital loss from the taxable income on which you figured the capital gain used to calculate your payments.
Capital losses are only deducted from capital gains. If you have non-capital losses, these must be recorded separately and cannot be deducted from your income.