A Registered Retirement Savings Plan (RRSP) and/or a Registered Retirement Income Fund (RRIF) are common investment tools that many Canadians hold for when they pass away. There are special rules dealing with the taxation of your RRSP/RRIF when you die.
As a general rule, when you die the entire fair market value of your RRSP/RRIF (and not just the growth) is included as income in your final terminal tax return and is accordingly taxed at your marginal tax rate. There are various exceptions to this general rule when you designate certain persons as the beneficiary of your RRSP/RRIF. In such instance, your RRSP/RRIF may be transferred on a tax-deferred rollover and/or taxed in the beneficiary’s hands. This article only focuses on one exception to the general rule: designating your spouse as the beneficiary of your RRSP/RRIF or successor annuitant of your RRIF. (Note that a “spouse” can be a legally married spouse or a common-law spouse.)
As it relates to a RRIF, you have the option of naming your spouse as the “successor annuitant” of your RRIF. In this instance, the fair market value of your RRIF is not included in your final tax return. Rather, the RRIF continues after your death. Your spouse becomes the annuitant, and all payments made out of the RRIF after your death will be taxed in your spouse’s hands.
As it relates to an RRSP or RRIF, you may designate your spouse as the beneficiary. If you designate your spouse as the sole beneficiary on your RRSP/RRIF, your spouse may opt to:
(i) directly transfer the plan assets to their own RRSP/RRIF
(ii) directly transfer the funds from your RRSP/RRIF to an issuer to purchase an eligible annuity
(iii) receive the proceeds from your RRSP/RRIF outright.
At a high level, under options (i) and (ii) noted above, your RRSP/RRIF can move to your spouse on a tax-deferred rollover basis. In other words, you will not be taxed on the fair market value of your RRSP/RRIF in your final terminal tax return. Rather, your spouse will only pay tax when they withdraw funds from their own RRSP/RRIF, receive payment from the annuity and/or die.
Under the option (iii) noted above, there is no tax deferred rollover in favour of your spouse if your spouse wishes to receive the proceeds from your RRSP/RRIF outright. In this regard, it is important to note that there is no requirement for your spouse to cause the transfer of your RRSP/RRIF on a tax-deferred rollover basis. Rather, if, for example, your spouse has an immediate need for cash, they can opt to receive the proceeds from your RRSP/RRIF outright.
For any of the options (i), (ii) or (iii) noted above, it is very important for your spouse to work with the estate accountant to ensure that your estate and your spouse are otherwise aligned in handling the tax filings in relation to your RRSP/RRIF. For example:
(i) The rollover in favour of your spouse does not simply automatically happen if you designate your spouse as the beneficiary. Rather, your spouse must make certain transfers by December 31 of the year following the year of your death. Additionally, your spouse will receive a tax slip for the amounts transferred, which they will need to include in their income and claim an offsetting deduction in order to actually achieve the spousal rollover.
(ii) If your spouse opts to forego the rollover and take the proceeds from your RRSP/RRIF outright, then your spouse would be jointly and severally liable to the Canada Revenue Agency for any taxes owing by your estate as a result, but only after the estate has otherwise been exhausted. This may cause significant problems for an estate that includes a blended family situation.
If you do not designate a beneficiary of your RRSP/RRIF, or your estate is named as the beneficiary, there may still be an ability to achieve the spousal rollover provided that, among other things, your spouse is a beneficiary of your estate. Once again, there are certain tax filings that will need to be made in order to accomplish the tax-deferred rollover in favour of your spouse.
If nothing else, this article should highlight for you that dealing with your RRSP/RRIF upon death is more complex than the generally accepted understanding that “it can just roll to my spouse.” During lifetime, be proactive about speaking with your financial advisor, accountant and lawyer about appropriate beneficiary designations for your own unique circumstances. In death, your executor and spouse will also need to be proactive in working with your financial advisor, accountant and lawyer in dealing with the transfer and taxation (rollover or otherwise) of your RRSP/RRIF.
This article is provided for general informational purposes only and does not constitute legal or other professional advice.
Jessi Brockman is a lawyer with Stevenson Hood Thornton Beaubier LLP in Saskatoon. Contact: [email protected]
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