October Tax Planning for Recent Inheritances

When Sarah inherited $1.8 million from her aunt's estate in April 2025, she thought the hard part was over once probate cleared. But sitting in our Mississauga office last week, she realized that without strategic year-end planning, she could face an unnecessary $85,000 tax bill come April 2026. October marks the critical planning window for inheritance recipients—with just three months until year-end, every tax-saving strategy must be evaluated and implemented now. The 2025 tax landscape, featuring increased capital gains inclusion rates and new reporting requirements, makes proactive October planning essential for anyone who's received an inheritance this year.

Understanding Your Inheritance Tax Position

Canada doesn't have an inheritance tax, but that doesn't mean inheritances are tax-free. The tax implications depend entirely on what you inherited and what you do with it. October is the perfect time to assess your situation and implement strategies before the December 31 deadline.

The October Advantage: Why Timing Matters

October provides the sweet spot for tax planning—enough time to implement complex strategies but with urgency to drive decision-making. Many tax-saving opportunities have strict year-end deadlines, and October allows for proper execution without the December rush when professionals are overwhelmed.

Strategic Move #1: Maximize Tax-Loss Harvesting

If you inherited a portfolio with embedded losses or have losses in your existing holdings, October is the time to crystallize them. With the capital gains inclusion rate now at 66.67% for gains over $250,000, offsetting gains has become even more valuable.

Consider David, who inherited $500,000 in bank stocks and sold them in July for a $60,000 gain. By reviewing his existing portfolio in October, we identified $40,000 in unrealized losses. Selling these positions before year-end will save him approximately $8,000 in taxes while allowing him to repurchase similar (but not identical) investments after 30 days.

Superficial Loss Rules

Be careful of the superficial loss rules when tax-loss selling. You cannot claim a loss if you or your spouse repurchase the same security within 30 days before or after the sale. October timing allows you to wait out this period and still repurchase before year-end if desired.

Strategic Move #2: Optimize Charitable Giving

Inheritances often inspire charitable giving, and October is ideal for maximizing tax benefits. Donating appreciated securities directly to charity eliminates capital gains tax while providing a donation receipt for full market value.

Strategic Move #3: Income Splitting with Family

October provides time to establish proper income-splitting structures. While attribution rules prevent simple transfers to lower-income family members, legitimate strategies exist for sharing the tax burden of inheritance-generated income.

Prescribed Rate Loans

With the CRA prescribed rate at 6% (Q4 2025), lending inheritance funds to a spouse or family trust can still generate tax savings if investment returns exceed this rate. October setup ensures a full quarter of income splitting before year-end.

Family Trust Structures

For larger inheritances, October allows time to establish a family trust before year-end. Income can be allocated to lower-income beneficiaries, potentially saving thousands in taxes annually. The trust can also provide creditor protection and estate planning benefits.

Strategic Move #4: RRSP and TFSA Optimization

Inherited funds provide the opportunity to maximize registered account contributions. October planning ensures you don't miss valuable contribution room and can strategically time contributions for maximum benefit.

Strategic Move #5: Real Estate Decisions

If you inherited real estate, October is decision time. Holding costs, market conditions, and tax implications all factor into whether to keep, sell, or restructure ownership before year-end.

Principal Residence Designation

You can only have one principal residence at a time. If you inherited a home and already own one, October analysis should determine which property to designate for the exemption. Consider future appreciation potential, current unrealized gains, and lifestyle preferences.

Rental Property Conversion

Converting inherited property to rental use triggers a deemed disposition. October provides time to obtain proper valuations and potentially elect under subsection 45(2) to defer the gain for up to four years.

Strategic Move #6: Investment Portfolio Restructuring

Inherited investment portfolios often don't align with your risk tolerance or tax situation. October allows for thoughtful restructuring before year-end, balancing tax efficiency with investment goals.

Strategic Move #7: Estate Freeze Considerations

For those who inherited significant wealth, October is the time to consider your own estate planning. An estate freeze can lock in today's values for tax purposes while allowing future growth to accrue to the next generation.

This strategy is particularly relevant given potential tax changes in 2026. October implementation allows time for proper valuations, legal documentation, and CRA advance ruling requests if needed.

Avoiding Common October Planning Mistakes

Mistake 1: Rushing Decisions

While October creates urgency, avoid making hasty decisions. Take time to model different scenarios and understand long-term implications. A wrong decision made quickly can cost more than missing a year-end deadline.

Mistake 2: Ignoring Provincial Differences

Tax rates and rules vary by province. If you inherited assets in multiple provinces or are considering relocating, October is the time to understand interprovincial tax implications.

Mistake 3: Forgetting About AMT

The Alternative Minimum Tax can surprise inheritance recipients, especially with large capital gains or donation tax credits. October planning should include AMT calculations to avoid unexpected tax bills.

Special Situations Requiring October Action

Inherited RRSPs/RRIFs

Non-spouse beneficiaries face full taxation on inherited registered accounts. October planning can explore options like pension income splitting (if eligible), RRSP contributions to offset the income, or strategic timing of withdrawals if the estate is still open.

Foreign Inheritances

Inherited foreign assets require October attention for T1135 reporting requirements, foreign tax credit optimization, and potential treaty benefits. The complexity often requires professional help to navigate correctly.

Business Interests

Inherited private company shares need October evaluation for potential reorganizations, dividend payments, or sales before year-end. The lifetime capital gains exemption might apply, but planning is required to qualify.

Your October Tax Planning Checklist

Working with Professionals: The October Imperative

October is peak season for tax professionals, so book appointments immediately. Come prepared with documentation, specific questions, and clear goals. The cost of professional advice typically pays for itself many times over in tax savings.

Looking Ahead: 2026 Tax Changes

October 2025 planning should consider announced and potential 2026 tax changes. The federal government's consultation on wealth taxes, changes to capital gains inclusion rates, and potential inheritance tax proposals all suggest that tax-efficient structuring now could provide significant future benefits.

Conclusion: October Action Creates April Relief

The difference between proactive October planning and reactive April filing can be tens of thousands of dollars in unnecessary taxes. Sarah, from our introduction, implemented a combination of tax-loss harvesting, strategic charitable giving, and family income splitting that reduced her projected tax bill by $62,000—all through planning that began in October.

Your inheritance represents both opportunity and responsibility. October planning ensures you maximize the benefit while minimizing the tax burden. Don't let procrastination cost you—the strategies available now won't be available after December 31st.