The general rule is that the market value at the date of death of an RRSP or RRIF must be included in the income of the year of death. Typically, this exposes such income to taxation at the highest marginal tax bracket. There are exceptions, however.

The RRSP or RRIF may be transferred tax-free to a surviving spouse’s sheltered plan. If that person is under age 69, the funds can be moved to an RRSP, whereas, if that person is over age 69, the funds must be moved to a RRIF.

The financial assets owned in the RRSP or RRIF at death do not need to be liquidated; they can be transferred as-is to the surviving spouse.

Alternately, the lump sum of an RRSP, RRIF or registered plan can be transferred to a child or grand child who was financially dependent on the deceased at the time of death. The transfer will be tax-free if the funds are used to purchase an annuity for a fixed number of years, not exceeding 18 minus the dependent’s age at the time the annuity is acquired. This annuity must be purchased within sixty days after the year in which the funds were received. If the beneficiary is mentally or physically infirm, the funds may be transferred to the recipient’s RRSP.

If a spouse is not named as the beneficiary of the RRSP/RRIF, the RRSP/RRIF becomes part of the deceased’s estate. The spouse and the executor of the estate can then make a joint election to have some or all of the RRSP/RRIF transferred to the spouse as a Refund of Premiums (RRSP) or Designated Benefit (RRIF). The spouse can then transfer these amounts to his or her own RRSP or RRIF. The amount received is reported as income but there is an offsetting deduction for the amount transferred to the registered plan.

Planning Considerations

  • Where a tax-free transfer opportunity exists, as above, ordinarily this is the best option. However, sometimes it may be wiser to fall into the “default” rules and have the RRSP taxed at death. This could be so where the value of the RRSP is small and the deceased’s marginal tax bracket at death is low.
  • As the deceased may have made “unused deduction” contributions in the years prior to death, it would be wise to claim these on the date-of-death return.
  • The executor may make spousal RRSP contributions after death and before the normal RRSP contribution deadline which can be claimed on the date-of-death return.
  • If the RRSP/RRIF is designated directly to a beneficiary who does not or cannot transfer the funds on a tax-free basis, a complication may arise. In this case, the RRSP/RRIF value is included in income in the year of death and may attract significant tax. However, this tax liability will need to be funded by other assets in the estate, which may be willed to parties other than who received the RRSP/RRIF. This may create a significant unfairness and hardship that was not foreseen when the deceased’s will was created.