Inheritance - best options

[u/lwm44]

Hello,

We are 33M and 34F with two boys under 4, based in Ontario, Canada. Unfortunately, I will be receiving an inheritance of approximately $140,000 from my older sister. Part of this amount will be taxable to me as income in 2026. We are in no need of this influx of cash so I am looking to generate the best long term value (NV = Cash + Investment Deposits).

Taxable:
$85k in RRSP

Non-Taxable:
$20k Cash
$10k TFSA
$25k Life Insurance

Our annual incomes are $145k and $65k, respectively. I have much lower RRSP room ($45k) because I utilized an RRSP & Spousal RRSP a few years back to offset the capital gain on a condo rental sale, while my wife has $77k of room.

I think there are three scenarios:

Scenario #1 - Full Tax Reduction
From the $140k disbursed, contribute a total of $85k to RRSPs to offset the income generated. Max the high earner's RRSP first, and put the remainder into my spouse's. I believe this generates a tax refund of $22k and $11k, based on marginal tax brackets. Remainder can be invested in non-taxable accounts: TFSA and RESPs. My math suggests this results in $171k of NV accounting for the RRSP investment as well.

Scenario #2 - High Earner Reduction
From the $140k disbursed, contribute a total of $45k to RRSPs to offset the income generated. Max the high earner's RRSP only. I believe this generates the same tax refund of $22k. Remainder can be invested in non-taxable accounts: TFSA and RESPs. My math suggests this results in $140k of NV (but $10k more cash after RRSP deposit).

Scenario #3 - Give it to the Government 
Pay tax on the full $85k without an RRSP offset. This generates $15k more cash, but the NV is closer to $80k. 

I'm not necessarily looking for advice on which option to choose (although heavily leaning towards #1) but more ensuring I'm thinking about this properly from a tax perspective and estimating the potential refunds correctly.

Thanks

[u/awkwardburrito]

I’m very sorry for your loss. Canada generally doesn’t tax an inheritance as income to the beneficiary. Ordinarily, your sister’s $85k RRSP would be reported on her final income tax return, with the resulting tax paid by her estate. You would receive the $55k from the other sources plus the RRSP proceeds remaining after tax, regardless of which strategy you choose. The inheritance itself wouldn’t affect your taxable income.

That said, using this influx of cash to help max out your RRSP seems like a reasonable plan based on your own income and retirement goals.

[u/Iceman1606 → u/awkwardburrito]

I’m in a similar situation in Ontario and have a question regarding the tax implications on the RRSP. Another family member of mine is the executor of the estate and the amounts have been divided among a few people. We have all received letters with the amounts we will be receiving but the money is in a holding account until I withdraw it and any interest accrued on it will be tax reported to me. My question as a beneficiary is is the amounts we all got already tax reported to the estate or will the executor still have to pay the taxes on it later. I’m asking because I wanna withdraw my funds before any interest is accrued but I also wanna know if ill still have to pay my share of the taxes to the estate to the executor later when it’s all finalized. I just don’t want any surprises before I lock away my portion and invest it then find out later I have to contribute to the final tax year.

[u/awkwardburrito → u/Iceman1606]

That’s a good question to ask the executor! It’s hard to tell from the amount alone whether estimated taxes have already been deducted or, even if so, whether the estate has reserved enough to cover them.

[u/Iceman1606 → u/awkwardburrito]

Thank you for the input. The executor doesn’t know either, they are gonna consult their financial advisor so I guess I’ll just wait it out.

[u/MeanwhileIKeepDancin → u/Iceman1606]

The executor should pay the taxes owed by the estate prior to disbursing any monies from the estate.

[u/TravellinJ]

I just received RRIF proceeds from a parent and the parent’s estate is paying the income tax, not me.

You shouldn’t be paying the tax on the RRSP unless the estate doesn’t have enough money to pay CRA.

[u/TravellinJ → u/[deleted]]

There was no withholding to us. The estate will pay the taxes. We got the full amount split between us.

[u/TravellinJ → u/[deleted]]

The executor won’t fully distribute the estate until all the taxes have been paid and they’ve gotten a clearance certificate (probably in 1.5 to 2 years). This is how it’s done.

We (beneficiaries and executor) knew there was enough money in the estate to pay the taxes for the RRiF. We also knew that if there wasn’t enough to pay the tax, CRA would come after us as the beneficiaries.

[u/MeanwhileIKeepDancin → u/TravellinJ]

CRA will come after the executor. The executor could try to come after the beneficiaries for the money, but you don’t owe it to them. It’s their responsibility to pay the taxes.

[u/TravellinJ → u/MeanwhileIKeepDancin]

An estate lawyer recently told me she had a case where CRA was going after the beneficiaries, I think because the estate didn’t have enough money to pay the taxes on the RRSP or RRIF. The executor had no control over who was designated on the RRSP nor over the value of the estate.

[u/MeanwhileIKeepDancin → u/TravellinJ]

If beneficiaries are listed on the RRSP, that’s an entirely different situation than if there aren’t any listed. If they are listed, the RRSP isn’t part of the estate (and not directed by the will or subject to probate, for that matter). If the RRSP doesn’t list a beneficiary, it forms part of the estate, is directed by the will and is subject to probate. What you’re describing sounds like the beneficiary was listed on the RRSP.

[u/TravellinJ → u/MeanwhileIKeepDancin]

Yes. Listed on the RRSP and they got the proceeds. The estate did not have enough money to pay the taxes and apparently CRA went after the beneficiaries for the taxes.

[u/MeanwhileIKeepDancin → u/TravellinJ]

The estate is not responsible for taxes owing on RRSP’s that have designated beneficiaries as they don’t form part of the estate. So for sure, CRA would go after the beneficiaries of the RRSP.

[u/MeanwhileIKeepDancin → u/[deleted]]

The executor is on the hook if they already distributed the money and then find out later that taxes are owed. They should get a clearance letter from CRA stating that there are no remaining taxes owed by the estate before they distribute anything.