What to do with an unexpected gain?

What to do with an unexpected gain?

 
Are you lucky and you win a large amount in the lottery? Have you just received an inheritance? Perhaps you will get a significant profit from the sale of your home? What to do with this unexpected inflow of money?

Before giving in to the urge to spend it all to spoil yourself, a little bit of hindsight is in order. After the perfectly legitimate euphoria at the start, get back to the hustle and bustle and give yourself a period of reflection.

Time, your best ally

Thanks to a few days of reflection, you will be able to better prioritize your ideas and projects. In addition, this period of time will allow you not to give in to immediate temptations that could turn into regrets later. At this stage, do yourself a favor and don't censor yourself.

Your current financial situation

The Your Personal Financial Report Calculation Tool (PDF, 272 KB) Opens in a new window. allows you to list your assets (assets) and debts (liabilities). Dig through your personal papers to gather all the necessary information (RRSP, TFSA, car loan, mortgage loan, etc.). Thanks to this calculation, you will know if your net worth is positive or negative.

If your net worth is negative, wanting to reduce or eliminate your debt is a smart move. You can still spoil yourself a bit and decide to devote a certain percentage to a purchase or a trip.
If your net worth is positive, you can use the unexpected gain for a project that is close to your heart or even invest it in an RRSP or TFSA.
Determine your favorite projects

In the case of a positive net worth, you have a happy problem: choosing the project you will carry out. First, try to narrow your list down by classifying the ideas into three categories: short-term, medium-term, or long-term expenses.

If you won or received a small amount of money, decide for yourself by following the steps described above. If it's a large amount, consulting a financial planner can shed new light on your options.

Taxable or not?

Lottery winnings, cash received as an inheritance and life insurance for the beneficiary are not taxable. However, if you invest outside of registered plans, such as RRSPs, TFSAs, and even registered education savings plans (RESPs), your investment income will be taxable.

Tax consequences on death

In the event of death, the property bequeathed by the deceased to his or her spouse can be transferred without immediate tax consequences. Income generated subsequently will be taxable if it is not invested in an RRSP or TFSA.

If a child or a third person inherits the property of the deceased, the latter will be presumed to have disposed of his property at the time of his death. Thus, in the deceased's income tax return, we could see, for example, the RRSP balance or the taxable capital gain on shares. When your father died, the shares were worth $ 22. For the Canada Revenue Agency, these actions cost you $ 22.

If you sell the shares for $ 22, you make no taxable capital gain.

If you keep them and later sell them for $ 30, you will make a capital gain of $ 8 per share ($ 30 minus- $ 22 = $ 8), taxable at 50%.

The main residence is not taxable

In the case of a rental property or a chalet, the tax impact will affect the deceased and not the heirs. However, there is an exception: if it is the spouse who inherits the second home or a rental property, there is a direct transfer to his name with no immediate tax consequences for anyone.

To better understand the impact that managing your earnings can have, read the article Three pillars to reduce your financial stress.