How Beneficiaries Are Taxed on Estate and Trust Income in Ontario

If you are a beneficiary of an estate or trust, you may wonder what you must report and what you can keep. The answer depends on what you received: the inheritance itself, or income that the assets earned after the death.

This article explains the general tax treatment in plain terms. Tax slips and amounts vary with the estate, so confirm your own situation with an accountant.

The inheritance itself is usually not taxed to you

The CRA lists most gifts and inheritances as amounts that are not reported or taxed for the person who receives them. Similarly, most amounts received from a life insurance policy following someone's death are not reported or taxed, although income earned on those amounts is taxable.

That does not mean the estate owes nothing. Taxes owed on the deceased's final return, and on income the estate itself earns, are dealt with by the estate trustee before the estate is distributed.

Income earned after death

Growth that happens after the date of death is treated differently from the value at death. The rules depend on the type of plan.

Keep the statements showing the value at the date of death and any growth after it. They help you and your accountant separate the two.

Registered plans: who pays tax on the value at death

For an unmatured RRSP, the annuitant is considered to have received the fair market value of all property in the plan immediately before death, and that amount is taxed on the deceased's final return. The rules change for a spouse, a common-law partner, or a financially dependent child or grandchild.

• If a spouse or common-law partner is the sole designated beneficiary and all RRSP property is transferred directly to a qualifying plan for them by December 31 of the year after the year of death, no RRSP amount is included on the deceased's return.
• Amounts paid to a qualifying survivor can be a refund of premiums taxed to the survivor instead of the deceased. Qualifying survivors are the spouse or common-law partner and a financially dependent child or grandchild.
• If the estate is the RRSP beneficiary, the amount can still be a refund of premiums when a qualifying survivor is also a beneficiary of the estate and the legal representative and survivor jointly file Form T2019.
• For a RRIF, if the contract or the will names the spouse or common-law partner as successor annuitant, the deceased is not treated as receiving the RRIF value at death.

Where a RRIF has a named beneficiary and no successor, the deceased is generally treated as receiving the fair market value of all RRIF property at death, though amounts paid to a qualifying survivor can be treated as a designated benefit.

Beneficiaries who live outside Canada

Income paid or credited by an estate to a non-resident beneficiary is subject to Part XIII withholding tax, and the estate reports it on an NR4 slip. Withholding on RRSP withdrawals paid to non-residents is 25%, unless a tax treaty reduces it.

Tax withheld by an estate or trust must reach the CRA or a Canadian financial institution on or before the 15th day of the month after the month it was withheld.

What to do next

• Ask the estate trustee what the estate paid or credited to you and what tax paperwork will follow.
• Separate the value at death from income earned afterward.
• Check whether you qualify as a spouse, common-law partner or financially dependent child or grandchild for registered plan rules.
• If you live outside Canada, tell the estate trustee early so withholding can be handled.
• Speak with an accountant before filing, and with a lawyer if the trustee distributes without a CRA clearance certificate, since the legal representative is personally liable for unpaid amounts up to the value of the assets distributed.

Frequently asked questions