You inherit some investments

Should you hold on to the investments you've inherited?

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. In fact, spouses have special status.

If the investments were bequeathed to a spouse, there is a tax-free direct rollover of the investment to the spouse. The same applies to RRSPs.

If the bequest is made to a child or third party, the situation is a little more complex. 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. Consequently, a new tax cost will be calculated, the adjusted cost base. If the heir chooses to keep the investment, this price becomes the purchase price, which will later be used to calculate the capital gain.

Investment certificates and other guaranteed investments

Most financial institutions allow heirs to buy back or keep investment certificates or any other guaranteed investment with or without penalty at the time of the testator's death. The only reason for keeping investments such as term deposits would be to take advantage of higher interest rates.

Stocks and bonds

It is possible to simply re-register stocks and bonds to the heirs, who then become their holders.

Choosing to keep or sell investments

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%

Stocks left to a spouse

Suppose, instead, that Jean-Pierre's father had left the shares to his spouse. The deceased would then not be taxed, and the share price for his spouse would be the same as that paid by the deceased ($16 per share). This price would be used to calculate the capital gain/loss when the spouse disposes of the stock (sale, gift inter vivos or bequest).