What to do with a windfall


So you’ve just come into some unexpected money. Maybe you won big at the lottery, or you received an inheritance, or you’re about to make some money on the sale of your home. Whatever the source of your windfall, you need to decide what to do with this sudden inflow of cash!

Your initial reaction will probably be an urge to celebrate. And understandably so! But it’s important not to succumb to the temptation to spend it all on yourself. Once that initial excitement has passed, take a step back and give it some serious thought.

Take your time

Taking a few days to think about it will allow you to get your plans and ideas in order. It will also stop you from giving in to immediate temptations that could later turn into regrets. At this stage, don’t be afraid to dream big.

Your current financial situation

Use a resource like this Your personal balance sheet (PDF, 272 KB) Opens in a new window. to make a list of what you owe (your liabilities) and what you own (your assets). Go through your files to gather all the necessary information (RRSPs, TFSAs, car loan, mortgage, etc.). Then add everything up to find out if your net worth is positive or negative.

  • If you have a negative net worth, reducing or eliminating your debts would be a smart choice. You can still treat yourself a little by dedicating a certain percentage to a purchase or a trip.
  • If you have a positive net worth, you can use the money for something special you’ve been saving up for or even invest in an RRSP or TFSA.

Decide what to do

If your net worth is positive, you have a good problem: having to choose what to spend your money on! To narrow it down, make a list and separate your ideas into three categories: short-term, medium-term and long-term plans.

If you’re working with a small amount of money, choose something yourself after making the list described above. If it’s a considerable windfall, you might want to talk to a financial planner to see what your options are.

Is it taxable?

Lottery winnings, inherited cash and beneficiary payments from a life insurance policy are not taxable. However, if you invest that money in anything other than a registered plan (i.e., an RRSP, TFSA or RESP), the investment income will be taxable.

Non-cash inheritances

If you inherit assets from your spouse, they can be transferred without immediate tax consequences. Any income generated on those assets will be taxable, unless they’re invested in an RRSP or TFSA.

If you inherit assets from a parent or non-relative, those assets will be presumed to have been disposed of at the time of death.

So any RRSP balances or taxable gains on shares, for example, will be reported in the deceased's tax return.

Let’s say you inherit shares from your father that were worth $22 at the time of his death. As far as the Canada Revenue Agency is concerned, you paid $22 for these shares.

If you sell the shares for $22, there’s no taxable capital gain.

If you keep them and sell them later for $30, you'll incur a capital gain of $8 per share ($30 minus $22 = $8), which is taxable at a rate of 50%.

Homes and other properties

If you’re inheriting a rental property or a cottage, it’s the deceased who will be taxed, not you. With one exception: if you’re inheriting a secondary residence or rental property from your spouse, it will be directly transferred to you without any immediate tax consequences for anyone.

To better understand the importance of properly managing your money, read Three tips for reducing your financial stress.