One of the best gifts you can leave your family after you pass away is a well thought out estate plan that can minimize tax obligations. Often, Registered Retirement Saving Plans (RRSP) and Registered Retirement Income Fund (RRIF) make up a large portion of an estate, which is why concern regarding these accounts is important when developing an estate plan.

A common question estate lawyers encounter with clients is what will happen to their RRSP and RRIF after they die. Upon death, the deceased’s RRSPs are deemed to have collapse, and the tax consequences depend on who is listed as a beneficiary of that RRSP. If the deceased does not have a qualified beneficiary listed, then as a general rule, the fair market value of the plan right before the death is included as income in the deceased’s tax return that year.

There are exceptions to these rules if you designate a qualified beneficiary. A qualified beneficiary in this situation can be the deceased’s spouse or common-law partner, financially dependent child or grandchild under the age of 18, or financially dependent child or grandchild with a mental or physical infirmity.

In order to designate a beneficiary, they can be named on the plan document or a will. If the former is chosen, it is important to ensure that the designation is consistent with any designation made in a will. In general, in the event they are inconsistent, the later designation revokes the earlier one. This can lead to conflicts between beneficiaries, if different individuals are listed on different plans.

When naming your spouse as the beneficiary, plan proceeds can be rolled over tax-free into their retirement plan, or in the case of a RRIF, they can choose to continue receiving those payments. The deceased can prevent an RRSP from being included in their income after death when all or part of the funds qualify as a ‘refund of premiums’. Canada Revenue Agency defines this as a payment that is paid from a deceased annuitant’s RRSP to a qualifying survivor.¹ The qualifying survivor who receives a refund of premiums can defer paying tax on the amount by transferring it to an eligible plan or fund.²

If there are no named beneficiaries, the RRSP benefit may be deemed to be received by the estate trustee. The amount of tax will then depend of the decisions made by the beneficiary and estate trustee. In addition, if a non-qualified individual is named as a beneficiary, it may cause conflict since the RRSP/RRIF passes over at gross value while taxes owed on it are paid out of the estate. Therefore, giving an adult child your RRSP and another adult child your equivalently valued non-registered investment may result in the latter receiving less after taxes are settled. Further, issues can arise when all of your children are named as equal beneficiaries, but one child predeceases you. In this case, their family may be left out from any distribution of the plan if the document is not specific enough.

If a minor child or grandchild is the designated beneficiary of the RRSP/RRIF, the funds can be used to purchase term-certain annuity. The child or grandchild will pay tax on such annuity at their marginal tax rate in the year they receive the payment. Since a minor child likely has nominal income, this can reduce the overall taxes payable on the RRSP/RRIF proceeds.

There are many different ways to issue your assets to your family after your passing. However, you choose to distribute those assets, it is always important to create a thorough estate plan. This will ensure that every benefit will be used to your family’s advantage, including minimizing tax obligations.

Articles written by Stacey Staios:

Locating a Missing Beneficiary
Power of Attorney Disputes
Independent Contractor vs. Employee
Family Law Litigation - Part 2
Family Law Litigation - Part 1
Family Status Discrimination
Social Media Policies in the Workplace
Calculating Equalization Testamentary Capacity Aggravated and Punitive Damages Leaves of Absence in Ontario Co-Parenting In The Age of a Pandemic Corollary Relief Disability Accommodation in the Workplace
Estate Planning: A How To Guide Should You Consider A Cohabitation Agreement? What Is Wrongful Dismissal?

Disclaimer

The content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Users of this web site are advised to seek specific legal advice by contacting members of Carson Law, Carson IP, or their own legal counsel regarding any specific legal issues. Carson Law does not warrant or guarantee the quality, accuracy or completeness of any information on this web site. The articles published on this web site are current as of their original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose.

References

¹ Canada Revenue Agency, ‘Death of an RRSP Annuitant- Refund of Premiums’ https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2019/t2019-fill-17e.pdf
² Ibid.