Death, taxes and RRSPs

Three steps you can take to ease your heirs' tax burden

Deanne Gage 11 March, 2014 | 6:00PM
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Another RRSP season has come and gone. While finding ways to increase contributions is usually top of mind, estate-planning strategies are also paramount for these plans. Upon death, our RRSPs are fully taxable on their fair market value, notes Frank Di Pietro, director of tax and estate planning at Mackenzie Investments. So, without planning, we could be adding significantly to our heirs' income and tax burden. "It doesn't take much to get into those top tax brackets, so trying to tax-shelter those RRSPs is really important," says Di Pietro.

Here are three steps Di Pietro recommends.

1. Pick up an RRSP designated-beneficiary form.

You can get this application from the financial institution where you hold your RRSP. Without anyone listed, the assets from the RRSP go through your estate and probate fees would apply.

2. Decide on the right beneficiary.

If your goal is to defer tax, the best option is to leave the RRSP to a spouse or common-law partner. When the surviving spouse simply rolls the deceased spouse's RRSP or registered retirement income fund (RRIF) into their own individual registered plan, there are no immediate tax consequences, Di Pietro says. Assuming you don't withdraw any amounts, tax then becomes something your kids or other heirs will have to worry about when you die. But if you as the surviving spouse decide to cash out your deceased spouse's RRSP, you'll pay tax on it.

Another option is leaving the money to a dependent child or grandchild. This strategy doesn't guarantee a tax deferral but allows the deceased to claim a deduction so the estate is not taxable on the RRSP value, Di Pietro says.

To qualify for tax deferral in this case, the child must either be a minor or have a physical or mental impairment. Then, the tax liability on the RRSP lies with them.

If an adult child has a physical or mental impairment, he has the option of transferring the inherited amount to his own RRSP, a trust or annuity. By doing so, he will defer tax on the entire inheritance, if it's done properly. Minor children, on the other hand, could use the proceeds to buy a term annuity to age 18.

Here's how the annuity works. Let's say a $200,000 RRSP was left to a 10-year-old minor daughter. When a term annuity is purchased, the money would be paid out over the next eight years. "That way the child would be taxable only on any annuity payments that came out each year," Di Pietro says. "This strategy is available only up to age 18, at which time there's no value left."

What about beneficiaries who are not a spouse or financially dependent child or grandchild? In this situation, your estate will pay the taxes on the RRSP before the heirs see any of the proceeds.

Di Pietro points out that registered charities could be a possible RRSP beneficiary. Last month's federal budget determined that the executor of an estate will have greater flexibility in choosing who would receive any donation tax credits when a gift is made by will or by beneficiary designation. It can now go to either the estate or the last two tax returns of the deceased. "It's an important change that gives executors some flexibility in tax planning," says Di Pietro.

3. Test your strategy with your heirs.

Make sure your heirs understand the consequences of what you are trying to achieve. While tax is deferred when the RRSP passes to your spouse, that doesn't mean there aren't any tax ramifications.

For instance, let's say William leaves his $100,000 RRIF to his wife Mary. Mary decides to transfer the money to her own RRIF, which now gives her $200,000, of which $100,000 was her own money. By combining the RRIFs, Mary has now doubled the amount of money she must withdraw from her RRIF.

Let's assume that William died in the same year that Mary established her RRIF. In the following year, Mary would have been required to take out $7,380 (7.38% of $100,000) if it was just her individual RRIF. But with her new supersized RRIF combining her and William's money, the withdrawn amount is now doubled to $14,760 (7.38% of $200,000), enough to push her into a higher tax bracket.

Di Pietro says some people draft wills that are not consistent with their beneficiary designations. Both things need to be considered together. For instance, a father's will may state "divide my estate equally among my three children" but meanwhile only one child is listed as the RRSP beneficiary.

"Typically the RRSPs are paid out to whoever is listed in the beneficiary designation," Di Pietro says. "That can pose a problem if that wasn't the father's intention. If one child has already received the RRSP and then receives one-third of the estate, the father hasn't really achieved his objective of equally transferring his estate. He's given one child more."

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About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and She can be reached at

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