Canadian inheritance & tax ?

[peanut]

Are there any Canadians out there that know anything about taxes and managing inheritances. Our financial planner arranged a meeting with an accountant who gave us what we feel was questionable advice.

He wants us to use my inheritance to fund a spousal RRSP that DH opens for me. He claims DH doesn't have to claim the money I give him as income...or that, if he does, the tax refund will cover the tax he's charged... We aren't really sure where he was going there.

DH and I have several issues with this. First, what does it mean down the road for me? Because the tax-free inheritance will be taxed twice then - once when DH gets the money, and again when I take it out. The idea is I will be at a lower marginal tax rate when I pull it out. BUT this is money that would be tax free except for investment income otherwise. And there would be less than the $8000 allowed tax-free by Revenue Canada for investment income each year. So this isn't making sense to DH and I.

Second, if DH opens a spousal RRSP for me, using my money, whose money is it in the event of a divorce? Not saying this might happen, but I happen to know the divorce rate for people with my disease is over 80%. People divorce because they can't handle the disease. I've seen it first hand and it's been scientifically documented. So whose money does it become? The accountant told us to talk to a lawyer about that.

The accountant also talked about splitting pension income once DH retires. DH rightly commented that then there would no longer be an advantage in me having that big RRSP, because I would be taxed in a higher tax bracket than the marginal tax bracket. The accountant kept talking about continuously funding this spousal RRSP with my inheritance money. Our question is: Is this legal? To give the money to DH and have him fund it for me, without DH claiming the inheritance money as income? Seems to me you have to claim any gift over $500 on your income tax form. Am I right?

I also have an issue with setting all the money aside in an RRSP. I'd like to spend some of it. At this point I'm beginning to think it would have been a lot simpler if I just took the money out and spent it all!

Anyway, has anyone done any number crunching on these kinds of scenarios? We are looking for a second opinion, and the accountant knows it.

Thanks for any advice. I'm just really confused at this point. I may need pointers in picking out a good accountant.

Jean

[mommy4ever]

Here's an article I've found.

In some ways it would make sense. Since it's an inheritance, it's not taxed anyway. Regardless in a divorce all assets are considered.

Have you spoken to a financial advisor at say a bank? our CIBC has a few really knowledgable people there.

You don't want one that is paid on commission, they dont' really care what happens to your money, just as long as they get it from you.

" VINOD KARNA
is a Senior Associate Manager with Clarica/Sun Life



Contributing to a
spousal RRSP makes sense

As well as contributing to your own rrsp, if you have a spouse (married or common-law), you can contribute to a spousal rrsp, based on your income level.

For some couples, this strategy can save significant taxation during retirement.

Use of a spousal rrsp is a method of in-come sharing at retirement. The idea is to build two pools of savings, one for each spouse, that will produce similar income streams at retirement. The taxes paid on the two income streams will likely be less than those paid if the income were to be taxed in the hands of one spouse, who would then be taxed in a higher tax bracket. The more income that can be generated by the lower taxed spouse, the better the savings.

Income sharing is particularly beneficial when one spouse will have substantial income from pensions and other sources, and the other spouse will have little or no pension other than rrsps.

If you and your spouse have significantly different incomes and/or pension plans, you may want to consider contributing some or all of your yearly rrsp contribution to a spousal plan. You will still receive the rrsp tax deduction for your contribution. Your total rrsp contributions (personal and spousal) are subject to your yearly rrsp limit, the same limit that would apply to your personal rrsp.

Since a spousal rrsp belongs to your spouse, the money you have invested in it also belongs to your spouse, and you have no legal say in the future investment or disposition of that money.

Although your spousal plus personal contribution cannot exceed your annual rrsp limit, the amount you contribute in a spousal plan does not affect how much your spouse can contribute to an rrsp. He/she can still contribute up to their yearly limit as well.

Most commonly asked questions are: Is it risky to invest in a spousal rrsp? What if we divorce, or if my spouse dies?

Use of a spousal rrsp is not really a risk. In most situations, if you divorce, all rrsps (spousal and personal) and pensions will be split between spouses.

In the event of death of one spouse, rrsps can be transferred tax-free to the remaining spouse (including common-law), provi-ded that the spouse was named bene-ficiary of the rrsp plan.

Depending on your situation, a spousal rrsp can be an effective tax planning strategy. Talk to your financial advisor to plan your finances better."

[mommy4ever]

http://www.mackenziefinancial.com/en...eritance.shtml

Here's another link, and there'sa book there to think about getting from the library. There's no rush to invest it or how, set it in the bank until you find the answers you're seeking.

[monkeywrangler71]

You might want to double check with Revenue Canada, but I am 99.9% sure that there is no tax on monetary gifts of any amount. Basically the accountant is telling you to take your money and invest it in a registered plan in your name, but to funnel it through your husband first in order for him to gain the tax benefit.
Yes, you will pay taxes when it is taken out, but that is offset by the taxes that your husband will not be paying this year - hopefully saving more tax in the current year than you would be paying in the year it is taken out. If your husband is currently in a high tax bracket, it is probably a good idea - particularly if he has a large pension coming, and/or a large amount of contribution room in his RRSP.

So yes, it is legal. No, you aren't paying tax twice - if it helps make it clearer, pretend you are living off of your inheritance and paying for the RRSP out of DH's income. Also, if you want to spend some or all, go ahead, there is no specific amount that you need to invest, do whatever you want with it and set aside whatever you are comfortable with.

As far as tying it all up in RRSP, I think you need to assess your own situation. Do you think you will need it within the next 5 years? Do you have enough liquid assets to cover emergencies? How far are you from retirement? You may want to invest some in an RRSP and some in a non-registered fund (I have no idea how large this inheritance is), but you will pay the taxes on the income from the non-registered fund as it is earned - which is actually a good thing if you have no other income, particularly if it is capital gains.

I'm going to stop typing now because I think I'm just making things more complicated

[peanut]

Mommy4ever:

Thanks! I already talked to the bank/firm managing the money and they actually advised the same thing, but that was before looking at our total financial situation. I'm waiting on them to draw up a financial plan at the moment.

Monkeywrangler71:

Thanks. I will have both the spousal RRSP and a non-registered account. Right now, I have no income other than whatever is earned in the non-registered account, which is held in the stock market right now. It's in a mix of dividend producing and capital gains type investments.

DH has a large amount of room in his RRSP right now. I think that's what opened the accountant's eyes a bit. Plus I am a SAHW, so I have no income or pension coming. That was where the pension splitting idea came in.

We have enough liquid assets to cover emergencies until DH retires in 6.5 years. We still set aside $600 every month for our EF, which currently sits around $3000. However, that is also our new car fund and our home reno fund...if we stay here.

I had hoped to pull $5000cdn/year for travel and my own expenses. I have siblings on the east and west coast I'd like to be able visit annually. I am creating a sewing studio in my basement and wanting to upgrade my blog and create a new website to sell my book. I'd also like some money to attend workshops, conventions, etc. I don't know how I'd do it though. It's not that much money!

I guess a part of me wants to use the money for my own personal things, rather than use it as money to live off, even in retirement. I want to use the money for things DH does not value or put high priority on, that I do. By putting it in an RRSP it becomes part of a general fund for living expenses...not the extras I had hoped it would be used for, if you know what I mean. If it stays in my name, I get complete control over it. As soon as it passes through DH's, it becomes 'his' money to control. And that worries me.

Also, if the money, which is solely in my name now, stays that way, then even a divorce lawyer would have to say it was mine. Rather than giving half of it to DH, wouldn't s/he?

Jean

[monkeywrangler71]

Divorce laws vary from province to province, so you might want to consult a local lawyer or legal advice hotline - I think that in some places inheritances are exempt from division. If that is the case in your province, I would ask for some legal advice about how to keep that money separate and protected.

Did the accountant actually show you some numbers when you consulted him? Was the tax savings significant? If its only a minimal amount, then I would probably forego it if I were concerned about my personal financial security, but if it's a substantial amount it would be a very difficult decision. Perhaps you can come up with a compromise, or a division - a portion for the things you want, a portion for your personal investment, a portion for the rrsp?

I don't think you need to decide now about the pension splitting. You can do that at pension time when you have a better idea of what each of your incomes is going to be.

[peanut]

Monkeywrangler71:

Thanks. I'll call the local legal hotline next week.

No, the accountant didn't show us actually figures. If he had, things might have gone much better and much quicker. Instead he repeated himself about four times and couldn't understand why we didn't understand him! Some of us just aren't auditory learners... I'm going to phone the provincial accountant professional organization and get the names of a couple other accountants to talk to.

About the income splitting, yeah, we determined in the end that it can't happen until he draws on the pension. So that gives us 6.5 years to think about it.

Thanks,

Jean

[peanut]

Well I did a search on-line and turned up the fact if I give my inheritance to DH to top up his RRSP, in the event of a divorce, the money would be split half and half. If I keep it in my name, because it is an inheritance, it is viewed as 'separate property' and goes completely to me.

So I did a search on divorce rates for my disease and find out it's 90%. I'm not impressed. DH, of course, says it'll only happen if I want it to. I'm laughing at that. I watched my parents divorce over this disease. Enough said.

DH did the calculations for income splitting, and it definitely looks like a better deal. So it looks like we'll go ahead with that.

Jean