Death of an RRSP Annuitant

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(Friday, February 12, 2010)

Summary

RRSPs are not only a good way to save for retirement – they can offer significant tax planning opportunities. If the proper steps are taken, tax can be deferred or minimized as part of an estate plan using the provisions of the Income Tax Act. If proper tax planning is not done, significant taxes can be payable on the death of the person holding the RRSP.

Article

When the owner of an RRSP (the annuitant) dies, the RRSP is treated as if the annuitant had received the entire amount of the RRSP on the date of death. As a result, income tax is payable on the tax return for the date of death. If the annuitant did not specify any beneficiaries for the RRSP, the funds (after taxes are paid) form part of the estate, and will be distributed according to the will, and probate fees will be assessed.

If the annuitant specified a beneficiary on their RRSP, the funds are paid directly to the beneficiary so that probate fees are not assessed, but the income taxes owing are paid by the estate of the annuitant. This can result in an imbalance of the inheritance, where the heirs of the estate receiving very little after the taxes are paid, while the RRSP beneficiary receives most of the value of the estate. If the estate is unable to pay the taxes due on the RRSP at the date of death, the beneficiary of the RRSP is jointly liable for the taxes owing on the RRSP.

If the annuitant has a spouse or common law partner, or a child or grandchild who is financially dependant by reason of mental or physical infirmity, the RRSP can be rolled over tax free to the spouse/child/grand-child, and no tax will be payable by the annuitant. The result is the same as if the spouse/child/grandchild had been the annuitant of the RRSP all along, and the spouse/child/grandchild will pay no tax until funds are actually withdrawn from the plan or annuity. Several steps have to be taken in order for this rollover to be available:

· the spouse/common law partner or financially dependent child/grandchild must be named in the RRSP contract as the sole beneficiary;

· The spouse or common law partner must tell the RRSP issuer to transfer all of the RRSP directly to an eligible plan (either an RRSP, RRIF, or purchase of an annuity). Notice has to be given to the RRSP issuer before December 31 of the year of death.

A WARNING - If the annuitant has named a beneficiary other than the spouse, common law partner, and dependent child/grandchild or named more than one beneficiary, the rollover is not available.

There is another provision that can be used when the beneficiaries include either the spouse or common law partner of the deceased, or a financially dependant child or grandchild. Amounts these beneficiaries receive from the RRSP can qualify for a special treatment, where the beneficiary essentially rolls the amount into their own RRSP.

Amounts actually received by the qualifying beneficiaries can be removed from the deceased person’s income and added to the beneficiaries’ income. The beneficiary can then deduct any amount contributed to an RRSP, resulting in no taxes being paid. This allows the legal representative and the beneficiary to minimize the total taxes paid.

Qualifying payments are the value of the RRSP at the date of death, plus income in the RRSP in the remainder of the year of death. The beneficiary can transfer any or all of the refund of premiums received to an RRSP, RRIF or annuity, and claim a deduction that will offset some or all of the refunded premiums included in income. This deduction is not the same as a regular RRSP deduction – the beneficiary does not have to have RRSP contribution room built up, and the deduction does not use up RRSP contribution room.

Anyone who has RRSPs and a spouse or common law partner, or financially dependent children or grandchildren should consult their accountant to make sure their estate planning is done correctly.