This is Not a “Consumer Alert”: Tax on the Sole Survivor’s Estate
I came across a recent CTV News Consumer Alert article/video clip about taxes on the estate when the bulk of the deceased’s assets were held in a Registered Retirement Savings Plan (RRSP) and a principal residence that had been owned as a secondary property for most of the deceased’s life. I think that the story, although very sad, is instructive for Canadians who may not have given much attention to tax and estate planning.
What is a Consumer Alert?
CTV News runs a regular Consumer Alert series, usually reported by Pat Foran, highlighting scams, rip-offs, and problematic consumer practices. Framing this particular story about a $660,000 tax bill as a “consumer alert” was, in my view, misleading. This was not about fraud or deception. It was the outcome of tax rules that apply to everyone, magnified by the rare circumstance of both parents dying in the same calendar year.
The Sad Circumstances of This Situation
The tragedy here is very real. Both parents died in their early 60s, and in the same tax year. This is statistically unusual. In most couples, at least one spouse lives into their late 80s or beyond, which is why retirement plans normally assume long lifespans. Still, when death comes early, it can create consequences families did not anticipate.
The RRSP and Tax
Tax-Deferred, not Tax-Free
RRSPs defer tax; they do not eliminate it. Contributions reduce income in the year they are made, growth is sheltered while in the account, but withdrawals are fully taxable. When the first parent, the mother, died, the RRSP rolled to the surviving spouse tax-free, as designed. But when the second parent, the father, died in the same year, there was no one left to receive a rollover. The entire balance, $715,000 according to CTV, was included in income on the final return.
What is Meant by “Kickback”?
The daughter referred to the tax as a “kickback.” In common usage, “kickback” implies something illegal or unethical, which was not the case. It seems she meant it more loosely, as in “a nasty surprise.” The important point is that the tax followed directly from how RRSPs work when both spouses are gone.
Cottages, the Principal Residence Exemption, and Tax
Cottages are a common source of tax surprises. Only a principal residence can be designated to shelter capital gains fully. A secondary property, like a cottage, usually generates a capital gain at death if it has appreciated in value. Families can sometimes make elections at a change of use, or designate the cottage for some years, but if the property has mostly been secondary, as it had been in this case (from 1998 to 2019) a large taxable gain is almost inevitable.
What Might the Family Have Done Differently?
According to the article, the daughter wanted to share her story to help others. With that same spirit, here are a few strategies that might have been considered:
Sell the Family Cottage
During the parents’ lifetime. Selling earlier would have crystallized the capital gain and allowed the parents to manage the tax bill themselves, possibly using proceeds to support retirement or make gifts to their children. However, given that the parents had made the cottage their principal residence, this was probably an unlikely option.
At the estate stage. After both parents died, the children chose to keep the cottage and liquidate RRSPs to cover the tax. This appears to have been a lifestyle choice: the daughter and son may have enjoyed using the cottage themselves over the years and wanted to continue that way of living with their own families.
The capital gain on the cottage was unavoidable since the last surviving parent had died. But by selling the cottage at that point, the children could have used the net sale proceeds to pay the capital gains tax and preserved roughly half the value of the RRSP, even after the RRSP’s own tax bill was settled. In other words, while they wouldn’t have kept the cottage, they would have retained a much larger pool of liquid assets.
By contrast, choosing to keep the cottage forced the liquidation of most of the RRSP. In 2024, the top combined federal and Ontario marginal rate was 53.53% on income over $246,752. Of the $715,000 RRSP balance, about $468,000 was taxed at that highest rate, and the remainder at progressively lower, though still significant, rates. That left the heirs with both the cottage (an illiquid asset) and a sharply reduced pool of financial assets.
It’s also worth noting that the cottage had about five years of principal residence designation (2019–2024), which would have sheltered some of its appreciation. The sale proceeds, net of capital gains tax, could have provided the beneficiaries with meaningful liquidity alongside the after-tax RRSP balance.
From a purely financial perspective, selling the cottage could have been a consideration. Evidently, retaining the property aligned with the children’s lifestyle values, but the trade-off was a significant loss of liquidity. For many families, these are the hardest estate planning decisions: it’s not about numbers alone, but about the kind of life they want to sustain.
Gift Money to the Children Earlier
Gifting assets during life is one way to reduce the taxable estate, though it must be balanced against the parents’ own financial security. They were still only in their early 60s. If the RRSPs were their only financial assets, reasonably, they would have had to plan for that money to last for another 30+ years. However, if practical, smaller gifts during one’s lifetime make sense. Marginal tax rates on the giver for liquidating a little bit extra from the RRSP (or most likely the RRIF after age 65), will be at a lower rate.
Buy Insurance
As Evelyn Jacks noted in the article, life insurance can provide liquidity to pay estate taxes. It does not erase the tax, but it prevents heirs from having to sell property under pressure. To be clear, the article did note that the parents had “a small insurance policy for her and her brother,” but we don’t know its value or how much it helped the heirs to pay for the taxes.
Elect to Pay the Capital Gains Tax on the Cottage in 2019
The cottage underwent a change of use in 2019. The parents could have elected to pay the accrued capital gain at that time. This would have reset the cost base. The trade-off would have been paying tax earlier, which many families understandably prefer to avoid. Indeed, a choice like that could have left the parents with insufficient assets to fund their expected decades of retirement.
Shift Their Investments to TFSAs
Since 2009, Tax-Free Savings Accounts (TFSAs) have provided Canadians with a way to shelter investment growth and withdrawals from tax altogether. As Evelyn Jacks noted in the CTV article, shifting some savings from an RRSP into a TFSA, even if it means paying some tax sooner, can sometimes reduce the risk of a larger tax bill later, especially when income at death pushes into the top marginal bracket.
This shift could have been approached in two ways:
Gradual withdrawals from RRSPs. The parents might have withdrawn more than they needed from their RRSPs during their lifetimes and contributed the excess to their TFSAs. While this would have meant paying some tax in the present, it would have ensured that future growth took place inside the tax-free shelter of a TFSA.
Directing new savings to TFSAs. Alternatively, starting in 2009, they could have chosen to prioritize TFSA contributions instead of adding further to RRSPs. The TFSA began with a $5,000 annual limit, gradually increasing to $6,500 in 2023, for a cumulative total of $88,000 each by the end of that year. Collectively, that gave them up to $176,000 of contribution room as a couple. With disciplined contributions and a reasonable investment strategy, it would not have been unrealistic for them to have accumulated around $250,000 together in their TFSAs by 2023. After the mother’s death in early 2024, those funds would have been consolidated into the father’s name.
Of course, TFSA contributions do not generate a tax deduction, and depending on the parents’ circumstances, giving up that deduction may have been difficult at the time. Still, from an estate planning perspective, particularly when life ends earlier than expected, the advantages are clear. Had they accumulated roughly $250,000 in TFSAs, their RRSP balance would likely have been lower, perhaps closer to $400,000 or less. The result would have been a significantly less heavily taxed estate, leaving more liquid assets available to their children.
Lessons Not to Be Learned
It is important not to take away the wrong lessons from this story:
- Not that RRSPs are a mistake. They remain an effective tool for retirement saving.
- Not that the CRA is greedy. The CRA is simply applying rules set out in law.
- Not that the heirs are greedy. Facing a sudden tax bill and property decisions is overwhelming in the midst of grief.
Five Practical Takeaways
Here are some concrete steps families can discuss with their financial planners:
- Keep RRSP and RRIF beneficiary designations current and consistent with your will.
- Consider modest RRSP/RRIF withdrawals in your 60s to reduce the size of the taxable estate.
- Decide early whether to keep or sell a cottage, and plan for the tax implications.
- Maximize TFSA contributions to shift future growth into a tax-free account.
- Think ahead about liquidity: life insurance, charitable bequests, or cash reserves can help the estate cover taxes without forcing sales.
The CTV story is a reminder that RRSP tax deferral is not tax forgiveness, and that cottages and other secondary properties carry inevitable tax exposure. The rare event of both parents dying in the same year made the outcome especially severe, but the underlying rules were not unusual. As Evelyn Jacks wisely noted, families who begin planning in their mid-50s, who use TFSAs strategically, and who consider tools like insurance where large tax liabilities are expected are better positioned to handle both the likely long retirement and the sometimes-unforeseen early loss. For others, those with relatively modest RRSPs, more assets in TFSAs, or non-registered accounts where gains are taxed more favourably, insurance may not be necessary. The lesson here is not to avoid RRSPs or resent the tax system, but to plan realistically for both life’s expected and unexpected turns.
This is the 301st blog post for Russ Writes, first published on 2025-09-29.
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