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RRSPs And RRIFs On Death


 

When you die, there may be money or other assets left in your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). As a general rule, upon your death the fair market value of the RRSP or RRIF is included in your income in your terminal year.

However, you will not be taxed in your terminal year if you leave the RRSP or RRIF to your spouse, child or grandchild as described below. Normally, you would name such person as the beneficiary of the plan right in the RRSP or RRIF contract, or under your will.

If your spouse receives the proceeds of your RRSP or RRIF upon your death, you are not taxed. Instead, your spouse includes the plan's proceeds in his or her income. However, your spouse is allowed a tax-free "rollover" if he or she transfers the proceeds to his or her own RRSP or RRTF, or uses the funds to purchase a life annuity or a term annuity to age 90.

Alternatively, if upon your death your spouse becomes the annuitant of your RRIF, or of an annuity which was purchased on the (prior) maturity of your RRSP, the RRIF or annuity income is included in his or her income as it is paid out.

Where there is no spouse, the RRSP or RRIF is not included in the deceased's income if it is left to a "financially dependent" child or grandchild. Generally, this means a child or grandchild whose income in the year prior to the year of the deceased's death did not exceed the personal tax credit exemption amount (currently, $6,456). In such case, the RRSP or RRIF proceeds are included in the child's income. If the child is under 18 years old, a tax-free rollover is allowed if the funds are used to purchase an annuity payable until the child reaches the age of 18. If the child was dependent upon the deceased by reason of physical or mental infirmity, the RRSP funds can be rolled over into either the child's own RRSP, RRIF, life annuity or term annuity payable to age 90.

Joint tax liability if no rollover

If the RRSP or RRIF is not left to your spouse or dependent child or grandchild as described above, the value of the plan is included in your income in the year of death. Naturally, this amount is then received free of tax by the recipient. Therefore, for example, if your (independent) adult child is the beneficiary of your RRSP or RRIF, you are taxed and the child is not.

However, in such cases the adult child is jointly liable (with your estate) for the tax payable on your RRSP or RRIF upon your death, to the extent of the RRSP or RRIF proceeds received by the child.

For example, say your RRSP was worth $200,000 when you died. The $200,000 is included in your income in your terminal year. Assume that this gives rise to an additional $100,000 of income tax. If your adult child is the beneficiary of the RRSP and your estate does not pay the $100,000 tax, Revenue Canada can assess your child for the tax.

This joint liability does not apply where the RRSP or RRIF was left to your spouse or financially dependent child or grandchild on a rollover basis as described earlier.

 
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