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RRSP inheritance money is taxed at the source by the deceased's estate, not the by the beneficiary.
Q: I am the executor of my sister’s will. Her daughter, who is 22, is the beneficiary for all her RRSPs. Does the beneficiary declare all this money on her 2014 tax return and pay all the outstanding taxes at that time? Or should I withhold 30% of the total amount of the RRSPs to pay the taxes owed?
—Rachelle S., Hamilton, Ont.
A: Your sister’s daughter is entitled to 100% of the money in the RRSP, without any withholding tax. Here’s why: The income will be included on the final tax return of her mother, and the tax paid out of her mother’s estate. Grace Chow is a tax specialist at Cadesky and Associates LLP, and the co-author of the book, “Taxation at Death.” She cautions that you “should not distribute all the funds until the estate is sure it has enough money from other sources to pay all its taxes. If the estate is short on the taxes, the executor will be personally liable for the shortfall.”
Now if your sister’s daughter was financially dependent on your sister, you might be able to do some tax planning. For example, you may be able to claim a deduction on that final tax return and have the income taxed in the daughter’s hands at a lower rate. Or even better, defer some of the income tax further by contributing funds to an RRSP in her daughter’s name.
Bruce Sellery is the author of The Moolala Guide toRockin’ Your RRSP. Do youhave your own personal finance question? Write to usat [email protected]
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My daughter just recently passed away leaving a RSP from General Motors to her husband of $158,000. He says that he must pay 30% off the top for federal and state, then he’ll be taxed again for it for 20% when he files taxes? So that’s 50% taxes paid on that money? Does that sound right?
We’re sorry to hear about your loss. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.