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Registered savings plans and your estate

Benjamin Franklin said there were only two things certain in life: death and taxes. While you can't avoid death. Having a strategy for your RRSP & RRIF withdrawals to help reduce the final tax bill on your estate is just smart financial planning. So be sure to discuss with an advisor to determine if there is a strategy that makes sense for you.

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earned on the underlying investments inside an RRSP or Registered Retirement Income Fund (RRIF) is not taxed until withdrawn.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 to a Beneficiary 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 and is in addition to any other income the deceased has earned for the year. 


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.  A “meltdown” strategy, taking higher than minimum payments out of the RRSP or RRIF to spread the tax bill over several years, prior to an individual passing away can also be considered as way to reduce the tax bill. 


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. 


The meltdown strategy is based on the theory that your yearly marginal tax rates over time, are lower than your marginal tax rate in the year of your death. Based on this idea, it is more tax efficient to withdraw the assets and be taxed over several years, rather than all at once in the year of your death.  To implement a meltdown strategy the individual increases how quickly they draw down on their registered investments allowing the assets to be taxed at a lower rate overall, and reducing the size of the registered investment that will be taxable on the final tax return. Now I always say, just because you are taking out more money, doesn’t mean you have to spend it!  Consider topping up your TFSA if you have room, or adding the money to a non-registered investment plan.  You can then use this cash or it can be paid to your beneficiaries with very little income tax down the road.

This strategy is generally to the benefit of the beneficiaries, not to the original owner of the RRSP/RRIF.  So be sure to discuss the strategy with an advisor to determine if it makes sense for you.


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. 


The tax rules when a person passes away can be complicated, and your advisor is the best person to talk to. He or she can refer you to a tax or legal specialist, depending on your specific situation.

© 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.

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