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Tuesday, February 17, 2015

I've cashed in the estate's registered assets - now what about the tax?

A reader recently wrote to me to ask about taxes on registered assets and pensions. Cashing them in is the easy part; figuring out the tax issues is the tricky bit. I know many of you are in a similar position, so I'm sharing the question and my response below.

"My mother recently passed away and I am the executor of her will and a beneficiary with my brother. She had RRSP's, Non Registered RSP's, TFSA and Registered Pension Plan. The investments I took the option of cashing out and received lump payments for all. Will this money have to be taxed in any way - as a beneficiary or will the estate have to cover tax for them? If there isn't enough money in the estate to cover them then what do I have to do?"

Yes, these assets you've mentioned are taxable, except for the TFSA (Tax-free Savings Account). When money is put into an RRSP, it is not tax-free; it's tax-deferred. This means the money is taxed when it comes back out. Obviously cashing them in on your mother's death means you've taken the money out.

I'm not sure what you mean by a "non-registered RSP", since all RRSPs are registered. I'll assume you mean non-registered investments, most likely held in a portfolio which may look very much like an RRSP.

There is one important piece of information that you haven't included in your note. Did the RRSPs, TFSA and pension plan name you and your brother specifically, or were they left to your mother's estate? Most people do name a beneficiary directly on their RRSPs, and on their pensions, but not everyone names a beneficiary on their TFSAs. You said that you and your brother are beneficiaries under your mother's will, so I can't tell whether she left everything to you through her will, or through the assets themselves.

In other words, I can't tell whether the assets  you've cashed are still in the estate (i.e. in your name as executor) or in your own name personally.

If the assets name the estate (or don't name anyone, in which case they will go to the estate anyway), then you should open an executor's bank account and deposit the funds. You will then use the money in that account to pay the taxes. You didn't say whether there were non-liquid assets in the estate such as a house, vehicle, life insurance, or stocks. If so, those may also be used to pay taxes on the liquid assets. Only after taxes, as well as other expenses such as the funeral and debts such as credit cards, have been paid should you and your brother divide up the money between you.

If the assets name you and your brother directly, then you may receive the money directly from the financial institution, and the estate is liable for covering the tax on them. Hopefully there is enough there. Please keep in mind, however, that if there are not enough assets in the estate to cover the taxes, Canada Revenue Agency will not be happy about that, and may come after you personally to the extent of tax on the inherited assets.

In order to close off the tax situation and get proof that all tax liability has been satisfied, you may apply for a Tax Clearance Certificate from Canada Revenue Agency.

If it turns out that there is not enough cash in the estate to pay the taxes, talk to an accountant before you start selling assets, and before you deposit any money into your own name. An accountant will be able to look at the specific assets, calculate the exact tax owing, and figure out the best and most efficient use of the existing assets to pay the taxes. The accountant will also help you get the Clearance Certificate. It is well worth the cost to get this help.

I hope this reply helps. There is nothing wrong with what you've done so far, at least as far as I can tell from your note, and reaching out for information is definitely the best way to go. I hope it all goes well.







2 comments:

  1. Final days wishes :my husband mother is dying and she changed her poa and will not too long ago.she wants her estate or her half of assets to go to my husband.my father in law and his siblings are not happy about that.she also changed her 4 houses from joint tenancy to tenant in common just to make sure his son/ my husband gets her half of the estate.he did not want to give up his non rejistered investment and did not want to give her half as she could die of cancer any day and they know that.she just wanted her half and to go to my husband.we know they can contest the will not the poa .but do they have any case at all.
    His mother wrote a lot of diary and notes expressing her wishes and why she has done what has been done.they are seperated and she potentially could pass any day !
    any suggestions

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  2. There is a ton that goes into estate and it's good to know the basics of how it works. I'm still young and don't have to worry about this quite yet, but it's smart to get ahead of everything so that I'll be ready for it later. This has some great insights on estate taxes and I can't wait to learn more about it.

    http://www.dunsmuirridler.ca/wills_and_estates.html

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