Some of us don’t care what will happen to our money after we die. Many of us, though, hate giving the government any of our money while we’re alive and want to make sure we give the government as little as possible after we die, too. By naming someone as the Beneficiary of our RRSP we can reduce two kinds of taxes and save money.
What Kind of Taxes Are Due When We Die?
For most people, when we die there are two types of taxes to be paid: Probate Fees and Final Income Taxes.
Probate Fees; Probate Taxes; Estate Administration Taxes
Governments love to say we have no death taxes or duties in Canada. Don’t believe it.
They just use different names for them. The most common names for these taxes that are charged only because someone died are
- Probate Fees,
- Probate Taxes, or
- Estate Administration Taxes.
Any assets that have to be reviewed by the Probate Court before they can be dispersed are subject to provincial Probate Fees or Probate Taxes. The probate charge is usually a percentage of the value of those assets. For example, if you had not designated any beneficiaries etc and had not completed a will and you died leaving possessions and assets worth $100 000, in Ontario, the Probate Fee would be about $1 000.
Final Income Taxes
You probably have some assets that are “tax deferred.” Common examples of tax-deferred assets include
- a RRSP,
- a RRIF, or
- non-registered investments such as stocks or bonds or a cottage which are worth more than when you bought them and which you would owe capital gains tax on if you sold them.
When you die, the government deems all of those investments to be immediately taxable (unless you have the proper types of beneficiaries and successors designated).
Say you had $20 000 in your RRSP at the time you died. If you don’t have the proper type of beneficiary designated, then that 20 000 will be added to your income on your final income tax return. (The one filed for you by the people who are still alive.) If you had already made $100 000 in employment income that year, you will now owe tax on $120 000 of income. Chances are good that means you now owe about $10 000 of that $20 000 to the government in income tax.
Why Designate Beneficiaries and Successors for your RRSP?
You name Beneficiaries for your RRSP to reduce or eliminate probate fees and final income taxes.
How Do I Name the Beneficiary for my RRSP?
The bank, credit union or financial institution where you hold your RRSP assets will have a Beneficiary form for you to complete. You must fill in the Beneficiary form and you may need to sign it.
If you have RRSP assets at more than one place you will have to fill out more than one form. For example, I have RRSP assets at BMO InvestorLine and at ING Direct. I had to fill out Beneficiary forms for both places.
BEWARE: Beneficiary forms are NOT cancelled or revoked by marriage. So if you designated your ex-wife or ex-husband as the Beneficiary for your RRSP, then they still will get your RRSP if you die even if you married someone else since then. Keep your Beneficiary forms up to date.
BEWARE AGAIN: The Beneficiary designation does NOT stay with your RRSP if and when you transform it into a RRIF. You must designate the Beneficiary for your RRIF specifically on the RRIF form provided by your financial institution.
Who Can We Name as a Beneficiary for Our RRSP?
You can name almost anyone as the Beneficiary for your RRSP. It gets a bit complicated, though, if you name someone under the age of majority (18 or 19.)
What If the RRSP Is Still Owed Repayments Under the HBP or LLP?
In general, if the person who died still owes repayments under the HBP or the LLP, then those owed amounts will be added to their income and reported on their Final Income Tax report. That means the Estate must pay more taxes than may be expected.
If the person who died has a spouse, however, the spouse can complete and sign forms so that the spouse will continue to re-pay the HBP under either the original payment schedule, or on the same schedule as their own HBP repayments, if applicable.
Similarly, if the surviving spouse wishes, the spouse can complete and sign forms that state that the spouse will continue to re-pay the LLP under the original payment schedule.
Please check with an Estate accountant or lawyer for details on both of these issues, if necessary.
More information is available from the Canada Revenue Agency website about HBP repayment options and LLP repayment options.
NOTE: The Beneficiary of the RRSP will only receive the amount of the RRSP at the time of death. They will not receive the amount of the RRSP plus the amount of the outstanding HBP or LLP contributions.
Please Warn Your RRSP Beneficiary About a Potential Tax Bill
According to an article by Wesley Dueck, your RRSP Beneficiary better not spend your money in a rush. Apparently it’s possible for your financial institution to give your RRSP Beneficiary the full amount of the assets in your RRSP *BEFORE* the federal tax Clearance Certificate is issued. Unfortunately, if there are not enough other assets in the estate to pay the final income taxes owing on the RRSP, then the government can bill the Beneficiary of the RRSP for the outstanding taxes. The Beneficiary must pay those taxes whether or not they’ve already spent the money that was in the RRSP.
According to Heather MacLean CPA CGA, the “CRA can hold the RRSP/RRIF beneficiaries liable for the deceased’s unpaid taxes up to the amount directly relating to the RRSP/RRIF they received.” She also states that the CRA can be slow in getting in contact with the RRSP beneficiaries. “… it can take several years for CRA to catch up with the beneficiaries. By this time, the inheritance could already be spent, but the beneficiaries would still be liable to pay the amount owing (plus interest).”
Plus Interest. Ouch!
I’d suggest if you inherit a RRSP that you ask the Executor for a copy of the federal tax Clearance Certificate before you spend any of the money!
If I Name My Spouse as the Beneficiary of my RRSP What Happens When I Die?
A spouse is your husband or wife, or your legally-recognized common-law husband or wife. Your spouse can be the same gender as you or the opposite gender. (And presumably any of the other 48 genders as recognized by Facebook.)
This is the simplest and cleanest type of Beneficiary to avoid taxes.
If your spouse is the properly designated Beneficiary for your RRSP and you die, then the RRSP money just shifts from your RRSP to your spouse’s RRSP.
There is no probate tax/fee payable.
Although your RRSP assets will be reported on your final income tax return, no income tax will be payable on them.
The RRSP does not have to be automatically closed. Instead, the assets can be transferred “in kind” to the living spouse’s RRSP. For example, if the person who died owned shares of Bell in their RRSP, the shares could be transferred to the surviving spouse’s RRSP. The shares do not have to be sold.
When the surviving spouse withdraws money from the RRSP in the future, then it will be taxed.
For example, if I died my RRSP assets could be transferred to my spouse with no tax paid. When he takes them out in retirement, however, he will be taxed just the same as if he was taking out assets from his own RRSP savings.
I suppose it is possible to keep marrying and designating the new spouse as a Beneficiary almost infinitely to avoid ever paying tax on RRSPs. If you have children, though, they might resent it if you re-marry at 99, then die and leave everything to their step-parent.
If I Name My Child the Beneficiary of my RRSP What Happens When I Die?
The answer depends in part on how old your child is on the day you die and on whether they are financially independent. These same rules generally also apply to dependent grandchildren. (A dependent grandchild, for example, is one raised by you not by the child’s parents.)
Adult Financially Independent Child
If your child is a legal adult (usually 18 in Canada, sometimes 19, check the laws for your province or territory) and if they are financially independent it’s pretty straight forward.
In this case, there is no probate tax/fee payable.
The RRSP will be closed. The value of the assets on the day you died will be added to your final income tax forms. If you had stocks, bonds and mutual funds in your RRSP, they will be valued based on the day you died. Income tax will likely have to be paid on the RRSP asset value.
Here’s the unexpected part, though: The BEFORE-tax value of the RRSP assets will be given to your Beneficiary (the child) often before the Executor gets the tax Clearance Certificate from the federal government.
That’s ok if there are enough other assets in the Estate to pay the required final income taxes. It’s not ok if there is a shortfall.
As described further on in this article, the CRA can come after the Beneficiary (the child) to pay any outstanding income taxes directly attributable to the income from the RRSP. So the child should not spend the RRSP monies until the Clearance Certificate is received.
Also, if the Beneficiary of your RRSP is different than the Beneficiary for the rest of your Estate you should do some calculations to make sure you are dividing your assets as fairly and equitably as you intended.
Adult Financially Dependent Child with No Disability
If your child is a legal adult they may still be dependent on you financially and be living with you.
There will be no probate tax/fee payable.
In this case, it may be possible for the adult child to claim the RRSP assets value on the child’s income tax return. This may reduce the total income tax owing.
Again, though, the child is entitled to the full value of the RRSP if the estate has enough money to pay the income taxes owing and pay the full value of the RRSP. Be careful that you take this into account when writing your will.
I would strongly suggest checking with an Estate accountant or lawyer in case there are tax-minimizing choices that can be made.
Adult or Non-Adult Dependent Child Living with a Disability
There will be no probate tax/fee payable.
It may be possible to transfer the RRSP assets from the person who died to a RRSP for the child with no income taxes payable. It may also be possible to transfer the assets to a RRIF or an annuity. It may also be possible to transfer some or all of the RRSP assets to a RDSP.
This is a complex subject and I strongly advise you to get advice from an Estate accountant or lawyer.
Non-Adult, Dependent Child
If your child is not a legal adult and is financially dependent on you, it gets murkier.
There will be no probate tax/fee payable.
The value of the RRSP assets will have to be claimed on someone’s income taxes. They could be claimed by the child on the child’s income taxes. Or they could be claimed on the final income taxes of the person who died. They can even be split and claimed on both income tax forms.
But taxes can also be deferred if the child is under the age of majority by buying an annuity that pays out over fewer than 18 years, as described in the tax laws. Some of the taxes would then be payable by the child each year of the annuity rather than all at once.
It would be a good idea to check with an Estate accountant or lawyer for details.
Again, be very careful when setting up your will. The Beneficiary is generally entitled to the full value of the RRSP.
If I Name Someone Else as the Beneficiary of my RRSP What Happens When I Die?
No probate tax or fee is payable.
The RRSP, though, will be wound up. The value of the assets in the RRSP will be added to the final tax return for the person who died. The Beneficiary is entitled to receive the full value of the RRSP.
Again, be cautious! If the Beneficiary of your RRSP is not the only Beneficiary under your will, you could give one person more money than you expect and the other/s less. If there is enough money in the balance of the Estate to pay the income taxes, then the full un-taxed value of the RRSP will go to the Beneficiary of the RRSP. The taxes will be paid out of those other assets (cash, value of the house etc.) reducing the amount received by the person inheriting those other assets.
If I Name a Charity as the Beneficiary of my RRSP What Happens When I Die?
If a charity is named as the Beneficiary right on the form provided by your financial institution for your RRSP, then no probate tax or fee will be payable.
Final Income Taxes will be owed on the value of the assets in the RRSP at the time of your death; however, the Executor will also get a Charitable Contribution Receipt for the amount given to the charity.
By claiming the charitable contribution, the tax owed on the RRSP may be reduced or eliminated.
It appears that it may be possible to get a deduction equal to 100% of the income taxes owing on an amount donated directly to charity if the amount is designated in the person’s will. It’s worth asking your lawyer about the details of this.
Isn’t It Good Enough to Name the Person in Our Will?
I’m not clear on whether designating the Beneficiary of your RRSP in your will allows the RRSP assets to skip the probate fee/tax or not. It looks like it does not avoid the fee.
It appears that if the Executor of the will and the proposed Beneficiary of the RRSP can agree, that it may be possible to follow the above strategies to minimize income taxes payable on the RRSP assets. It’s not clear whether probate tax/fees can be avoided. (It looks like they can not be avoided.)
Why leave such a confusing mess, though? Why not just designate your Beneficiary for your RRSP with your financial institution and put a copy of the form with your will or other important papers?
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