Mitigating tax on large RSP received by children from decased parent

Tax Topics
1

I have a client whose mother died in 2025 aged 67 years. The child (client), who is also the executor, is the beneficiary of her mother’s RSP which was valued at $1.2M at the time of mother’s death. I understand that normally the full amount of the RSP must be included in income in the year of death. Is there any way to mitigate or defer any part of the (substantial) tax owing on the RSP income? Many Thanks.

2

Here is what our trusted advisor (AI) says:
Children Who Are Not Dependents

If your child is financially independent (e.g., an adult), the RRSP cannot be rolled over on a tax-deferred basis. Instead: [1, 2, 3]

  • The full fair market value of the RRSP will be included as income on your final tax return.

  • This can trigger a massive tax bill for your estate.

  • The net cash that remains after taxes are paid can then be passed to your children as an inheritance. [1, 2, 3]

Warning: Trust AI at your own risk - but it does give you an idea of what will happen.

3

To late now, but she should not have drunk the coolaid served by the RRSP people, and instead have focused more on TFSA and other investments. With RRSP you either get hit with clawback, or high tax bracket on death, so the total tax paid in the end is much higher than that saved by contributing to RRSP.

4

Bert, to be fair, lots of people have maxxed TFSAs too AND have managed investment accounts to the extent possible.

5

That is fair, a very large part of my clients are in that position, and I do not feel sorry for them. But it often occurs that the focus is on RRSP, because of the tax deduction, and they do not have any or much TFSA, which is tunnel vision.

6

Yep - agreed! Balance is important (same when younger for mortgage paydown vs RRSP vs investment).

7

Don’t forget that any income from the date of death is reported on the trust return which will be at a lower rate.

8

@helga_spence

Yes, but any income earned on that “principal” is generally small compared with the balance of RRSP funds sitting there, and that balance (at date of death) becomes fully taxable income on the terminal T1.

9

You always buy your potential 10-baggers using your TFSA. :slightly_smiling_face:

10

If only we knew which ones were going to be 10 baggers :laughing: