We are often asked about what happens to Registered Retirement Saving Plans and Registered Retirement Income Funds (RRSP/RRIF) upon death. There are factors including, but not limited to, survivorship, named beneficiaries and marital status that will impact the deemed disposition on an RRSP/RRIF. In this post I want to look at 3 scenarios for RRSP/RRIF on Death. Those 3 are: Spousal rollover, death with qualifying beneficiary and death with non-qualified beneficiary.
It should be noted this topic deals specifically with retirement and estate planning. It is recommended that the Will reflect the wishes of the owner of the registered account. Further to this, any named beneficiaries should be consistent for any registered account. Consistency of wishes of the owner of the assets before eventual death is a priority. On an individual basis all decision makers and involved beneficiaries should be included in this conversation.
For the purposes of this post, we will review 3 scenarios for RRSP/RRIF and the death of annuitants. These scenarios are:
1. Spousal Rollover
2. Death with qualifying survivor
3. Death with non-qualifying survivor
We will highlight the taxable incidence, effect on estate and distribution to final beneficiaries in each scenario. In general, we want to minimize the taxable incidence for the estate of the deceased. Note the following information is general in nature and should not be taken as direct advice. For specific inquires regarding personal situations, we recommend inquiring directly to us.
1. Spousal Rollover
This deemed disposition requires a few material considerations. The first of which is the spouse is named as the beneficiary on the RRSP. Upon death the funds may be transferred into an RRSP or RRIF to the surviving spouse on a tax-deferred basis. This can occur independent of the surviving spouse’s RRSP contribution room as the CRA allows for this rollover.
In the case of a RRIF, the payable taxes will be on the amount being withdrawn once the RRIF is in place for the successor holder. There is no taxable incidence on transfer. Normal RRIF rules apply once the surviving spouse receives the proceeds of the deceased’s RRSP/RRIF. This is one of the most common occurrences when a spouse predeceases the other. The next taxable incidence will occur upon the death of the surviving spouse. This segues into our next 2 scenarios as possible scenarios for the survivor of the deceased.
2. Death with Qualifying Beneficiary (non spouse/non-common law)
First, we will define a qualifying survivor. The CRA defines this as:
'A qualifying survivor is the deceased annuitant’s spouse or common-law partner or a financially dependent child or grandchild.'
In scenario one, we have shown what happens when the spouse or common-law partner receives the proceeds of the RRSP via the spousal rollover. In this scenario we examine the scenario for a financially dependent child/grandchild.
In this scenario the CRA constitutes that the proceeds must enter a registered plan to be considered a transfer. If the dependent child is dependent because of physical or mental impairment, proceeds can be transferred to an RRSP, PRPP, SPP, RRIF, RDSP or Annuity. Should the child be dependent NOT because of physical or mental impairment, the child can only purchase an annuity. This annuity can be based on a payment period of no more than 18 years.
In both scenarios for the dependent child, the transfer does not create a taxable incident. However, when the annuity is in place or in the case of a registered account, once the child begins receiving payment, the withdrawals will be taxable. It is important to note the beneficiary must be on the RRSP/RRIF account.
3. Non-qualifying survivors
If there is no surviving spouse or qualified survivor to rollover the assets to, there will be an immediate deemed disposition on death. The value of the RRSP will be considered earned income. In layman’s terms, the deceased has paid out the entirety of the RRSP assets to themselves when they die. The assets will now make a part of the deceased’s estate. This may cause a large tax liability depending on the amount of assets in the RRSP. In this scenario, once the tax liability is accounted for, the remaining assets will be left with the estate to be distributed as laid out in the will.
This means that the estate is responsible for the taxation. Once the taxes due are paid, the remaining portion enters the estate. The assets can then be distributed via the directive in the Will. This does not incur a taxable incidence beyond the income taxes payable via the estate.
For a simple example, Jim Deadson has recently passed on at age 65. He has one lone child, Tim aged 40 who was not named on the accounts but is named in the will. The value of the RRSP on death was $250,000. This amount will be considered earned income and will be taxed accordingly. The taxable incidence will be upon deemed disposition of the RRSP at death. Jim in essence will have paid himself the full value of his RRSP and an T4RSP slip will be issued.
Once the assets have entered the estate post-taxation, the assets can then be distributed to Tim as per the Will. The assets are then available to be used as Tim sees fit. There are no restrictions on assets once they have exited the estate trust and reached the beneficiary.
Summary.
It is important to understand the implications of death and its effects on an RRSP/RRIF. Generally speaking, the assets can rollover on a tax-deferred basis if the named beneficiary on the account is a qualified survivor. If the survivor is non-qualified, the assets will enter the estate and be taxed as earned income to the deceased. Only when the assets have entered the estate post-taxation, can the assets be distributed to the beneficiaries.
If no beneficiary is named on the account or the will, the assets will enter the estate trust. It is imperative to have the desired beneficiary named on the account and consistent with the Will.
This article represents a piece of the estate planning puzzle. We would recommend, to ensure clarity and consistency, that one’s Will and wishes matches the beneficiary designations of all registered accounts. Furthermore, any registered account beneficiary should be reflected in the will as to ensure consistency. This may open up a larger conversation for including all decision makers and named beneficiaries in wills or on registered accounts.
Finally, we recommend speaking with a financial advisor and estate planning specialist.
- Alexander Philipp BA CFP
Alexander Philipp is attached to PEAK Securities Inc. as (Investment advisor). PEAK Securities Inc. is a full service broker registered with IIROC limiting its responsibilities to investment products such as stocks, bonds , ETFs and mutual funds. The information contained in this document has been prepared by Alexander Phillipp a registered investment advisor attached to PEAK Securities Inc. The information has been obtained from sources considered reliable and relevant. The information in this document is general in nature and may not be complete in regards to your personal situation. This document does not constitute investment advice. The opinions expressed above do not necessarily reflect those of PEAK Securities Inc. Peak Securities is not liable for the content of this document.
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