An RRSP holder can name the beneficiary of his or her plan as either one or more individuals or his or her estate. Each of these choices has different implications for tax and probate purposes. If an individual is named the beneficiary, the RRSP or RRIF is not subject to probate, however if the estate is the beneficiary, it is subject to probate.

If the Estate is named as the beneficiary, the entire RRSP is taxable to the deceased in the year-of-death tax return. However, a spouse or common-law spouse can elect, jointly with the executor of the estate, to transfer all or part of the RRSP to him or her. Any amount of this transfer NOT contributed to the spouse’s RRSP is taxable to the spouse. The whole amount transferred to the spouse is deductible from the deceased’s income, but any amount not transferred is taxable to the deceased.

If a spouse or common-law spouse is named as the beneficiary and the entire RRSP is transferred to the spouse’s RRSP by the end of the year following the year of the plan holder’s death, then neither the deceased nor the spouse pay tax on it. If the entire RRSP is not transferred OR the time deadline is not met, then the value of the RRSP at death is taxable to the deceased. However, the spouse can file a Form RC 4177 in which Chart 2 permits the transfer of this income away from the deceased’s return. Depending on the timing of this, it may involve an amendment to the date-of-death return. Any or all of the income up to the value of the RRSP at death can be transferred to the spouse. That amount, plus any increase in value from the date-of-death to the end of the year after the year of death, is eligible to be transferred to the spouse’s RRSP. The increase in value from the end of that second year until the time of actual transfer from the deceased’s RRSP is taxable to the spouse, with no sheltering option.

If a child or grandchild is named as beneficiary and was dependent on the deceased due to physical or mental infirmity, the RRSP may be transferred to an RRSP for him or her and is therefore not taxable to the deceased.

If a child named as a beneficiary is under 18 and not infirm, the proceeds of the RRSP must be used to purchase an annuity which pays out over no more than 18 years minus the age of the child. Each year’s payment would be taxable to the child and no amount is taxable to the deceased.

If the beneficiary is a non-dependent child over the age of 18 or any other individual, the entire RRSP is taxable to the deceased in the year of death.

All income earned by the RRSP after the death of the planholder and before it is distributed to the beneficiary is taxable to the beneficiary. Interest and dividend income are taxed as ordinary income and therefore dividends are not eligible for the dividend tax credit. If investments are sold before distribution, the difference between the proceeds of sale and the fair market value at the date of death may give rise to capital gains or losses which are reported by the beneficiary.

The beneficiary receives the investment portfolio at its fair market value on the date of death, not at its value on the date of distribution.

Planning Points

Conventional practice is to name a beneficiary, particularly when it is a surviving spouse. This avoids probate fees on the RRSP. Furthermore, typically, the spouse transfers the entire RRSP to his/her RRSP and this defers (but does not avoid) taxes. However, this conventional, almost-automatic estate planning strategy probably deserves more scrutiny than it gets. The benefits of all forms of tax planning derive from one or both of two elements: marginal rate advantage and deferral. Some tax planning strategies benefit from both, some from one but not the other, and some benefit from one and actually lose from the other.

  • Transferring the deceased’s RRSP tax-free to the spouse’s RRSP obviously benefits from deferral. However, it may be disadvantaged by marginal rates. For instance, if the surviving spouse ends up with a very high income, both the OAS clawback and high marginal rates may come to bear. Thus, it may be wise to travel the unconventional path, and consider deliberately exposing some of the deceased’s RRSP to tax if the marginal rate is low on the date-of-death return. It also might be wise to expose some of that same income to the survivor’s marginal rate in the same tax year. For the named beneficiary situation, this would involve elections made on the Form RC 4177. For the Estate as beneficiary, this would involve the joint elections of the spouse and executor (who may be the same person).
  • If there is no surviving spouse, naming a beneficiary avoids probate. The beneficiary is entitled to the full RRSP proceeds but the Estate is responsible for paying the income tax on the full amount. This could result in unforeseen inequity in the distribution of the Estate to more than one beneficiary. Where there are not enough assets in the Estate to pay the tax on the RRSP, the Income Tax Act reduces this inequity by considering the RRSP beneficiary jointly liable for the tax.
  • Where there is a named beneficiary and the RRSP portfolio includes dividend paying stocks, it is wise to distribute the RRSP to the beneficiary as soon as possible to preserve any dividend tax credits for the beneficiary, which is otherwise lost until the transfer occurs.