You inherit cash

In Canada, there is no inheritance tax on:

• inherited capital, cash included
• life insurance, if you are the beneficiary

You'll have to pay income tax, however, on any income earned from these funds.

What to do with money inherited

First determine what your priorities are. You can:

• travel or fulfill an old dream
• get your finances in order by paying off your debts

"Those who pay off their debts get richer," the saying goes. Once your debts are paid off, you can invest in your future by putting your money in a tax-sheltered investment, or even investing outside of RRSPs.

Before making any decision, take a good look at your family situation and draw up a statement of your net worth, listing your assets and debts

Pay off your debts

List your debts, ranking them by priority based on their rate of interest. In order, the most costly debts are usually as follows:

• unpaid balances on department store credit cards, including "Buy now, pay later" programs
• credit cards from financial institutions and lines of credit
• consumer loans and mortgages, especially if you are just beginning to make payments

You can wait a bit longer to pay back loans whose interest is tax deductible.

Put money in a tax-sheltered investment

Once your debts are paid off, the remainder of the inheritance can be invested. First consider investments that will act as tax shelters for your money:

• unused RRSP contribution room; you can even kill two birds with one stone by using the resulting tax refund to pay off your debts
• contributions to your spouse's RRRSP
• the Registered Education Savings Plan (RESP); you can even take advantage of up to $400 per year in federal grants and use your unused contribution room to a maximum of $4,000 per year

What is the best option?

RRSP investments

It all depends on your investment time frame and investor profile. The longer the time frame, the more you should opt for growth securities.

There are two types of RRSP investments:

• fixed-income securities (certificates of deposit, bonds and other guaranteed investments that provide secure, regular income)
• growth securities (shares in growing companies, units in mutual funds that invest in these types of companies, and market-linked guaranteed investments)

You should diversify any investments you make in growth securities, and invest on the Canadian, U.S. and international markets.

Invest outside of RRSPs

First consider the tax implications of investing outside of RRSPs. We recommend investments that produce capital gains and pay dividends rather than interest, as the tax rate is lower.

Here is an example:

If your income is $35,000, according to 2007 tax tables:

• your interest income would be taxed at 32.9% in Quebec (21.55% in Ontario)
• taxes on dividend income varies between 11.7% and 17.3% in Quebec (0% and 3.86% in Ontario)
• the tax bite on capital gains would be 16.5% in Quebec (10.78% in Ontario)

Capital gains are taxable only when you sell the securities in question, and you can always reduce the tax burden by selling off other securities that would generate a capital loss.