RRSP when you die

What happens to your RRSP when you die?

August 2016

Most folks are familiar with the tax perks associated with contributing to a Registered Retirement Savings Plan (RRSP), however what might not be as well-known is what happens to your RRSP when you die. When you pass away you are deemed to have collapsed your RRSP and any remaining money is included as income on your final tax return. Depending on the amount of funds left in your RRSP and who you designate as your beneficiary the collapsing of your RRSP might create a significant tax bill. 

If you leave your spouse or a dependent child as beneficiary of your RRSP you have an opportunity to defer taxes. Your RRSP can rollover tax free to your spouse or dependent child. The funds will eventually be taxed, however it will not be all at once and it will be in the hands of your spouse or dependent child.

Apart from the rollovers mentioned above, if you designate anyone else as beneficiary of your RRSP, when you pass away the proceeds of your RRSP will be paid to your designated beneficiary, but your estate is responsible to pay the tax. If your estate does not have adequate funds to pay the tax Canada Revenue Agency can go after your beneficiary and hold them liable for the unpaid tax. When your estate is responsible to pay the tax it can create a tax burden and may have unintended consequences for your beneficiaries. 

A simple example: Brock is a widower and has two children, John and Jane. Brock only has two assets a bank account which holds $100,000 and a RRSP with a balance of$100,000. Brock names John the beneficiary of his RRSP and names Jane as the residual beneficiary of his estate. Brock assumes this set up will mean both children will get $100,000. Upon Brock’s passing John will receive a payment of$100,000 from Brock’s RRSP. Brock’s estate will have to claim the $100,000 RRSP payment as income in his final tax return. This means the money in Brock’s bank account, which in this simple example is his entire estate, will have to pay the tax on the RRSP. For simplicity let’s assume the tax on the RRSP payment is$30,000, this means Jane will only receive $70,000.

I believe the above example, although simple, illustrates the importance of proper planning. A few tips: consider the designation of your beneficiary carefully, when creating your estate plan work with a professional to ensure taxes, legal issues and other matters are properly addressed. Also don’t die with lots in your RRSP! The larger the balance you have remaining in your RRSP the larger the potential tax liability. To reduce the burden incorporate steady withdrawals from your RRSP as part of your retirement plan. 

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.