Following the sudden death of her mother, a 36-year-old reader received inheritance investments. Both liquidator and sole heiress, she wonders how to organize this succession.
Audrey*, an only daughter, finds herself an orphan at the age of 36.
“My mother has just died and for the first time in my life I am liquidating an estate,” she says over the phone. I inherited a large amount in the form of investments and I am not sure how to manage the transition. »
Audrey’s father having died a few years ago, she is also the only heiress.
“My mom had RRIFs, TFSAs, GICs and mutual funds,” she explains. What should I do with this? »
In answering our questions, Audrey understands that her mother had registered and non-registered investments in two types of products.
A $65,000 RRIF GIC (Guaranteed Investment Certificate) maturing in September 2024, an $82,000 TFSA GIC with the same maturity, and a $217,500 non-registered investment in mutual funds.
Audrey has already transferred all investments to an estate account at the financial institution where her mother was a client.
“I would like to know how to lower my tax bill, because I know that I will have to pay tax on this inheritance. »
“And then what do I do with this unexpected money?” What do I put it in? “, she wonders.
Salary: $175,000
FAMILY: $145,000
RRSP space available: $20,000
BACK: $100,000
TFSA space available: none
Non-registered savings: $5,000
Mortgage: $200,000 (1.74% fixed 5 years)
Sylvain B. Tremblay, financial planner, vice-president private management at Optimum investment management, looked into the questions raised by the liquidator-heiress.
First of all, there must be a tax bill on the return on the portfolio of mutual funds held by the deceased, that is to say on the capital gain, explains Sylvain B. Tremblay.
The fund is deemed to have been sold at fair market value on the day of death. The heiress will have to pay tax not on the $217,500, but on any capital gains generated since the mutual fund opened. Only 50% of the capital gain is taxed on the deceased’s return, because he is not a spouse.
The GIC TFSA can be cashed now without interest or at maturity in September 2024 with interest. The TFSA is not taxable, but the interest income generated by the GIC from the date of death is and will have to be added to the income of the heiress in her 2024 taxes, explains the financial planner.
The RRIF was deregistered upon death and transferred unchanged to the estate account. The $65,000 will also generate interest income until maturity in September 2024. The full amount will become deregistered and must be added to the deceased’s 2024 tax return.
The liquidator must make sure to keep the necessary funds to pay the taxes.
The TFSA and the RRIF will no longer exist. They will simply become a sum of money.
The liquidator-heiress could decide to settle the estate immediately by transferring all the assets in her account.
“She is someone who has a very good income and, as a result, she pays a lot of taxes. Instead of transferring the money to the heiress’ account right away and having to pay the high rate of tax on this additional income, she could benefit from a progressive tax by leaving the estate to drag on for 36 months. until 2026.”
The term used to refer to this extension of succession is “post-mortem administration”.
Instead of having a marginal rate of tax payable of 49.96% and subsequently rising to 53.31% for the amounts added by the inheritance, the portion of the inheritance will be taxed at a marginal rate from 12% to 36%.
If the investments are made from the estate account and not transferred to the account of the heir, the marginal tax rate will be more advantageous.
Since 2016, tax laws limit the period during which an estate can benefit from a progressive tax rate to 36 months.
“We agree that in his case, it will not be savings to break everything, because it is not a question of an estate of a million, affirms the expert. However, the person could save $3,000 per year for three years. »
The second option: lower his taxes by contributing $20,000 to an RRSP, the space he has left, with the money from the inheritance or with his annual savings.
“For now, I advise him not to touch his mortgage. Even if the amount is available, it is not reimbursed. A rate of 1.74% until 2025 is great,” insists Sylvain B. Tremblay.
“At the end of the term, the situation should be analyzed. If the rate went up to 8%, I would pay her back…Unless she was married,” the planner raises.
If the heiress wants to be sure that she will not have to share this inheritance in the event of divorce, she must place it in a new separate RRSP and that we can clearly follow the progression of interest or gain. in capital.
Where should she invest? According to Sylvain B. Tremblay, the heiress must sit down with her planner or advisor to establish a long-term investment policy.
“Adhering to an investment policy gets you through the tough times. In 2022, those who have done better are those who have stuck to their investment policy. Same thing in 2008.
“If the heiress already has an investment policy, she only has to add the new amounts to her existing portfolio, either to add new investment categories or to enhance others. »
As Audrey is only 36 years old and her investment horizon is long, Sylvain B. Tremblay recommends that she focus her investment policy on stocks of good quality companies with good balance sheets that will survive the little recession. who is coming.
“However, I wouldn’t go into cybercurrencies. You have to be able to bear that risk, it’s so volatile. »
