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Registered Savings Plans and Your Estate

How to avoid a tax surprise from your RRSP or RRIF

Most Canadians are familiar with the tax advantages of using registered savings plans to save for retirement. Contributions to Registered Retirement Savings Plans (RRSPs) are tax-deductible, and any growth or income earned on the underlying investments inside an RRSP or Registered Retirement Income Fund (RRIF) is not taxed until withdrawn. But what happens when an RRSP or RRIF owner passes away? To help provide some clarity, we’ve compiled a list of answers to some frequently asked questions. 


Under Canadian income tax laws, an individual is deemed to have sold or cashed in their assets for their fair market value at the time of death, including RRSPs and RRIFs. This means a T4RSP or T4RIF slip will be issued indicating the fair market value of the RRSP or RRIF at death. 

It is the responsibility of the estate, and ultimately the estate beneficiaries, to pay income taxes on RRSP or RRIF assets even though those assets may have been paid directly to a beneficiary named on the plan. It is also important to note that for Canadian residents, no taxes are withheld on amounts paid out of an RRSP or RRIF due to death.


The value of the RRSP or RRIF, as indicated on the T4RSP or T4RIF slip, must be included in the owner’s income for the year of death. This amount is fully taxable as regular income. 


If the RRSP or RRIF is left to a qualifying beneficiary (named directly on the plan or will), it is possible for the value of the RRSP or RRIF at death to be taxable to the qualifying beneficiary and not the estate.


1. Spouse or common-law partner[2]

The assets of an RRSP or RRIF can be transferred directly to a spouse or common-law partner’s RRSP or RRIF as a tax-free rollover. If the surviving spouse or partner is under age 71, the assets can be transferred to their RRSP. If the surviving spouse or partner is age 71 or older, the assets can be transferred to their RRIF or eligible annuity. 

The surviving spouse or common-law partner will report the value of the deceased’s RRSP or RRIF on their tax return for the year and will receive an offsetting deduction for the transfer. They will be taxed on any withdrawals made in the future. The actual transfer of the RRSP or RRIF must take place in the year the survivor receives the deceased's RRSP or RRIF, or within the first 60 days of the next year. If the transfer does not take place during the required time frame, the full value of the RRSP or RRIF can still be included on the surviving spouse or partner’s tax return, but no offsetting tax deduction will be allowed. 

In the case of a RRIF, the surviving spouse or common law partner may be named a successor annuitant in the plan or the will. This means that they will simply receive the same periodic payments the deceased received from the RRIF. No special taxation issues arise on death when a successor annuitant is named; instead, the successor is taxed on the payments received each year. 

2. Financially dependent infirm child or grandchild If an RRSP or RRIF is left to a child or grandchild who was financially dependent on the deceased by reason of mental or physical infirmity, the value of the RRSP or RRIF is usually not taxed in the hands of the deceased. In this situation, the child or grandchild can transfer the assets into their own RRSP or RRIF, or purchase a life annuity.[3] The transfer must take place in the year the RRSP or RRIF is received, or within the first 60 days of the next year, and the dependent child or grandchild will be taxed only on future income or withdrawals. 

An infirm child or grandchild is considered financially dependent on the deceased if his or her income in the previous year was less than the basic personal amount plus the disability amount for that previous year. If the child’s or grandchild’s income is above this amount, he or she may still qualify as financially dependent, but only if the financial dependency can be demonstrated based on the particular situation. 

3. Financially dependent minor child or grandchild If an RRSP or RRIF is left to a minor child or grandchild who was financially dependent on the deceased, the value of the RRSP or RRIF is usually not taxed in the hands of the deceased. Instead, the minor child or grandchild can use the RRSP or RRIF to purchase a term certain annuity. The maximum term for the annuity is a period equal to 18 years minus the age of the child at the time of purchase. Depending on the age of the child, this may defer tax only for a short time. However, since a minor most likely has few or no other sources of income, this may allow the income to be taxed at a lower tax rate than it would have been on the deceased’s final tax return. 


If an RRSP or RRIF is left to an adult child who is not mentally or physically infirm, there is no tax deferral available. The amount will be fully taxable on the final tax return of the deceased and will be passed directly to the adult child named as beneficiary.  


If the estate is named as beneficiary of the RRSP or RRIF, generally the fair market value of the RRSP or RRIF is included as income on the deceased’s final tax return. However, if an amount is paid from an RRSP or RRIF to the estate and a qualifying beneficiary is named in the will, the legal representative of the estate and the beneficiary may file a joint election to treat the RRSP or RRIF proceeds as being paid directly to the beneficiary, in which case the same potential tax planning opportunities to the deceased's estate will be available. 


To estimate the potential tax bill on the estate requires assumptions on how long you live, how much your RRSP/RRIF earns, and how much is withdrawn.  The trade-off between taking more taxable income from your RRSP/RIF during your life to reduce tax for the estate involves estimating your tax situation both now and in the future.  Once I project the amount of potential tax on death from the RRSP or RRIF, some clients will ask if putting savings to the RRSP was worth it.  In fact, if you contributed to your RRSP while you were in your peak earnings years, and received tax-sheltered growth for a decade or two, and withdraw from your RRSP when you have very little other taxable earnings -- the RRSP/RRIF has definitely saved you money.   If you are in your working years, we can help you determine the savings vehicle most suitable to your situation.  The tax rules when a person passes away can be complicated, and we recommend you speak to a tax or legal specialist, depending on your situation.  As always, we are here to talk, to create your financial plan and retirement projections, to manage and monitor your investments so that they are suitable to your tax and income needs.  


© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. 

[1] Quebec residents receive another form, RL2, used to file their tax returns with Revenu Québec.

[2] As these terms are defined in the Income Tax Act (Canada).

[3] The existing RRSP rollover rules are extended to allow the rollover of a deceased individual’s RRSP proceeds to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild.