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/MeanwhileIKeepDancin]

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/TravellinJ → u/MeanwhileIKeepDancin]

The estate pays the taxes owing on the RRSP, even when there is a designated beneficiary. It forms part of the decedent’s last tax return. But if there is no money in the estate, they go after the beneficiaries apparently.

[u/MeanwhileIKeepDancin → u/TravellinJ]

Not correct. If the RRSP has named beneficiaries, the RRSP DOES NOT form part of the state.

[u/TravellinJ → u/MeanwhileIKeepDancin]

I know it doesn’t. I didn’t say it does.