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When You Inherit Money

What happens when you inherit money? or a house? or stuff?

It depends on how you treat the money when it first arrives. If you put an inheritance into a joint bank account, or into a joint trading account, in the future the money will be treated as a joint asset. This means if you get divorced down the road you could lose half of your inheritance. So as a general principle, inheritances should always go into a separate account.

Houses are treated specially. If you put a house you inherited from grandma in both names, then it will definitely be split in a divorce. Even if you don’t put both names on the house, your partner could claim that it was the primary marital residence and make a claim for a share.

Alberta operates under the dower act, which is designed to ensure that a spouse cannot be disenfranchised from their share of marital property. The western provinces also have the homestead act which ensures that a spouse can make a claim on the family farm.

This is especially important for someone who inherits a farm or a family business outright. It is very important to discuss the future of this asset with your lawyer and financial advisor before it is even transferred to you.

If you keep the money separate, the original inheritance will probably not be included in any future divorce settlement or separation agreement. However, it is possible that income produced by the asset or the increased value of the asset might be.

So what do you do? Pre-nup. Or co-habitation agreement. Or post-nup. Talk to your significant other, spousal equivalent or current bed-buddy about money, who owns what, who gets what, and how it could play out if things don’t work out.

Talk to your lawyer. A simple pre-nup/co-habitation agreement shouldn’t cost more than a couple hundred bucks, and can save you thousands of dollars and tons of heartbreak down the road. Define who gets what, and where the money goes if something happens.

Although it’s pretty common for someone to leave that inheritance to their own kids, or grandkids, nothing says that you can’t keep the asset separate, and subject to a pre-nup/co-hab agreement in the event of a couple separating, and yet leave the asset to your significant other in your will later.

 

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Filed under Estate Planning, Estates, Finance, How It Works, inheritance, pre-nuptial agreement, Saving, Wills

RRSPs & Divorce

I’ve been getting  a number of questions lately about how RRSPs are treated during a divorce.

Although every province has slightly different divorce laws, they all treat RRSPs in a similar way.

It doesn’t matter who the RRSP or Spousal RRSP belongs to, and it doesn’t matter who actually contributed the money in the RRSP or Spousal RRSP. All RRSP contributions made during the years you were married (but not before) are considered marital property, just like your house. So they can be divided up between the two of you, or traded off against another asset.

For instance, say one partner has both an RRSP and a company pension, while the other doesn’t. If the money is close to equal, the partner with the pension could offer to give up the RRSPs in order to keep the pension for themselves.

In my own situation, I traded my share of the RRSPs for his share of the house.

Spousal RRSPs can be contentious during divorces because they belong to the spouse who’s name is on the account, not the person who contributed the money. But! Because you are getting divorced, all the money has to be counted in the communal pot.

So the contributor may, or may not, get some of their contributions back. Although, in practice, the higher earning spouse who has contributed to their wife’s or husband’s RRSP usually has a lot of RRSPs and Pension credits in their own name, so the chances of that happening in real life are pretty slim.

 

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The Cost of Tax Phobia

A lot of people are so scared of the entire idea of tax season, that they rush right down to the tax preparer in the mall, and pay them to make it all go away. These guys charge anywhere from $40 and up.

Some people use tax preparation services that offer refunds right on the spot. This is where things can get costly.

If you file your return online, under normal circumstances you should have your refund in a week or two. If you get your tax return prepared by the instant refund people you get your money right away. The cost you pay for this convenience is ridiculous. You can pay up to 15% of your refund for this service.

You should also know that if you pay someone else to do your tax return, and they make a mistake, it’s not their problem. It’s yours. CRA will make you fix the mistake, and you will have to pay any penalties, interest, or late charges yourself. The guy in the mall has no responsibility.

Some of these tax preparation companies have also begun to encourage customers to accept their instant tax refund in the form of a preloaded debit card instead of a cheque. These debit cards are so loaded with fees and charges that they reduce the real cash available in your pocket.

My advice? If you decide to do things this way, ask for a cheque, avoid the debit card. Best advice? Get a simple tax preparation software program, and do it yourself.

 

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50% off Coupon on Easy Tax Tips

To celebrate the first day of Tax Season, from now until April 15, I’m happy to be able to offer a coupon for 50% off the price of Easy Tax Tips for Canadians at Smashwords.

Click on the link here, enter the coupon code SM43D and download the book in your favourite version.

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Easy Tax Tips for Canadians

Available at Amazon.com or Smashwords.com

My new book “Easy Tax Tips for Canadians” is now available.

Written in the same accessible style as my blog, this is the tax book for you if:

  • You hate tax season,
  • You don’t understand your taxes,
  • You’re afraid you always miss a deduction,
  • You wish someone could make this easier.

Easy Tax Tips keeps it simple, with hints and tips for regular wage earners, in plain English that allows you to save money by doing your taxes yourself.

You can buy the ebook version for $2.99 in all formats including Kindle and epub here. Or you can get the paperback version for $5.99 from Amazon.

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How to Get a Bigger Paycheque

Have you ever heard of a Source Deduction Waiver?

Every payday your employer deducts the amount of  tax set by the Canada Revenue Agency. This money is applied against your annual tax bill.

But not everyone has the same income tax circumstances. There are people who have significant deductions, like monthly RSP contributions, child care expenses, or even deductible investment loan interest, which often result in a sizable tax refund each year.

If this describes your situation, you might be eligible for a Source Deduction Waiver. A source deduction waiver means that your employer could deduct less tax from your paycheque each month. If that’s the case, it will mean that you won’t receive a huge refund at the end of the year, however you will get more money every payday.

While it does feel nice to get a big refund every spring, you have to remember that this refund is your own money, which you have given to the government as an interest free loan for the past twelve months. I am sure you could come up with better ideas than of what to do with a little more money every month than the government does.

For the proper forms, go to the Canada Revenue Agency website, www.cra-arc.gc.ca, and search for form T1213.

If you are up to date on your taxes, the government will calculate the proper amount, and authorize your employer to reduce the tax withheld. Please remember that this is not automatically renewed, you do have to reapply each year.

Put a little more money in your own pocket next year.

 

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