Lifestyle | Inevitable, inheritance tax?

Four children have just inherited their father’s RRSPs. If the total sum of 1 million dollars makes you dizzy, it will fall by half once the tax is paid. Is there a solution to avoid this tax bill?

The situation

Died suddenly in May 2024 at the age of 68, Robert* did translation and writing contracts for more than 35 years. Most of his life he was self-employed.

“My father had no pension fund. He amassed on his own and with rigor the amount of money that his advisor told him he needed for his retirement,” writes his eldest son Jasmin*, who is the liquidator of the estate.

His mother, who died of cancer six years ago, had already left her RRSPs to her husband without any tax bill.

However, the current situation is completely different, because it is the children who inherit RRSPs.

“I heard that we had to give half of our RRSPs to taxes. Is there any way to avoid losing this money that my father has saved all these years? », questions Jasmin.

“If there is no way to not give $500,000 to governments, what should my father have done to prevent the situation? We will all learn from his mistakes,” he continues.

The family home must also be sold. Jasmin is worried about the capital gain. Will he still have to pay tax?

“My father wanted a traditional funeral at the church, with embalming, viewing and burial in the cemetery near my mother,” he says. My father insisted that we invite as many people as possible to dinner to remember the beautiful moments in his company. We estimated the total cost of the funeral at $20,000. »

The four children aged 28 to 35 consider themselves lucky that their parents were able to leave them this money which will help them in their lives as parents and future owners.

The advice

Ronald Miglierina, notary, tax specialist and financial planner at the Fonds FMOQ financial services company, analyzed this inheritance case.

If the children had been minors and financially dependent, the RRSP would have been transferred and they would have had choices to make, he explains.

“We can decide that the RRSP, in whole or in part, be taxed to the child for the year of death. This is a first planning that exists,” he indicates.

This option is also possible in the case of a child heir over the age of 18, but he must still be financially dependent. If the child lives with his parents and has income that does not exceed $18,571 for 2025, this heir will pay less tax than the deceased person.

“There is a second possible plan,” he continues. If the child is 14 years old, he could take his $250,000 RRSP as an inheritance, buy an annuity contract from an insurer, then have an annuity paid until he turns 18. This allows you to defer tax for 4 years, then at the same time benefit from lower tax rates than if you taxed the deceased parent. »

The financial planner specifies that, in this example, the value of this child’s inheritance is not $250,000, but this amount minus the tax payable.

In the case of a surviving spouse, the RRSP is transferred without paying tax.

“Because the law, what it says, is that the deceased person must be taxed on the market value on the day of death. »

What is the tax amount?

The RRSP amount is added to the deceased person’s income for the year.

In 2024, the combined federal-provincial rate for incomes between $173,205 and $246,752 was 49.97%. For incomes of $246,752 and more, the rate was 53.31%.

With $1,000,000 in an RRSP, half will go there.

Is there any way to prevent this situation before you die? No.

“Of course there is always life insurance,” says the expert. But we don’t take out life insurance to avoid paying tax. Rather, it is when we question whether the net value of my estate after tax is sufficient. If the answer is no, you can consider taking out life insurance. Particularly in the case of inheritance of real estate which is not liquid. »

Ronald Miglierina points out that there are costs to life insurance and that advanced calculations are necessary before making a decision.

Disburse more RRSPs?

A sick person with a life expectancy of only a few years, who does not have a lot of income, but a lot of RRSPs or RRIFs could choose to disburse more.

This person will pay less taxes. However, there will be less to replace and the income will not be sheltered from tax, specifies the expert.

“It’s certain that when we look at the tax bill upon death, we say: ah, it’s scandalous,” agrees the tax specialist. It’s true, it’s not fun. But on the other hand, the person benefited from their RRSP during their lifetime. »

As for the sale of the house, the tax specialist wants to reassure Jasmin. Since it is his father’s principal residence and it is not rented, there will be no tax to pay on the capital gain.

A little-known solution

“There is a tax advantage that people don’t know about,” says Ronald Miglierina. When the estate retains the services of a real estate broker. »

Let’s assume the unoccupied, unrented house sells for $410,000. If the real estate broker takes a 5% commission on the sale plus taxes, the estate will pay approximately $23,500.

This sales commission can be transformed into a deductible capital loss on the deceased person’s income tax return for three years.

In Robert’s case, this amount can be applied to the RRSP. However, you must calculate 50% of this $23,500, which makes $11,750.

So the calculation would look like $1,000,000 – $11,750. You would then have to pay tax on the remaining $988,250.

* Although the case highlighted in this section is real, the first names used are fictitious.