RRSPs and RRIFs can be valuable tools to reduce your income and ultimately pay fewer taxes throughout your working career when your income is likely to be at its highest. However, it’s important to designate beneficiaries in your RRSP/RRIF contract and to have a plan in place to withdraw from your RRSP/RRIF once you retire, as holding an RRSP/RRIF at the time of your death can result in a significant income tax bill.

This article will discuss the tax implications to an individual of holding the following 2 types of registered accounts at the time of their death:

  1. An unmatured RRSP
  2. An RRIF

General rule

As a general rule, when an individual taxpayer dies, the fair market value of their RRSP/RRIF at the time of their death has to be reported as income on their final return.  This is why significant income tax can result.

Unmatured RRSPs

An unmatured RRSP is one that has not yet started to pay retirement income.

Exception to General Rule – Spouse is Sole Beneficiary

To qualify for this exception, the following conditions must be met:

  1. The spouse is designated as the sole beneficiary of the RRSP, and
  2. By December 31 of the year following the year of death, the RRSP property is transferred into an RRSP or RRIF (or certain other specific registered accounts) under which the spouse is the annuitant.
If the above conditions are met, no immediate taxes will be paid on the first spouse’s death.

Exception to General Rule – Qualifying Survivor

To qualify for this exception, the following conditions must be met:

  1. The deceased’s spouse or financially dependent child or grandchild – a qualifying survivor – receives an amount from the deceased’s RRSP, and
  2. The amount received from the deceased’s RRSP qualifies as a refund of premiums. An amount may only be considered a refund of premiums where the executor and the qualifying survivor jointly file Form T2019, Death of an RRSP Annuitant – Refund of Premiums, to designate all or part of the amounts paid to the estate as a refund of premiums received by the qualifying survivor.

If the above conditions are met, the amount to be reported on the deceased’s final return can be reduced. The amounts by which the income inclusion is reduced on the deceased’s final return will in turn be reported as income by the qualifying survivor.

A qualifying survivor may defer paying tax on the refund of premiums by transferring it to an RRSP or RRIF (or certain other registered accounts) of which they are annuitant. It is important to note that the transfer by the spouse to their own RRSP or RRIF must be completed within the year of the refund of premiums or within 60 days after the end of the year.

The end result is that the deceased taxpayer will have to report the fair market value of their RRSP as income on their final return, less any amounts designated as a refund of premiums. The qualifying survivor will include the refund of premiums as income on their tax return which may be offset by the refund of premiums transferred to their own RRSP.

RRIFs

Exception to the General Rule – Spouse is Successor Annuitant

If the spouse of a deceased annuitant is named as successor annuitant in the Will or RRIF contract, they automatically become the annuitant of the RRIF. As a result, the deceased will not have to report the fair market value of their RRIF as income on their final return, and the spouse will make withdrawals from the RRIF after the date of death as if the spouse had always been the owner of the account.

Exception to General Rule – Spouse is Sole Beneficiary

Similar rules apply to RRIFs as they do to unmatured RRSPs.

Exception to the General Rule – Qualifying Survivor

Similar rules apply to RRIFs as they do to unmatured RRSPs, except for the fact that, rather than a qualifying survivor receiving a refund of premiums as they would from an RRSP, the qualifying survivor must receive a designated benefit from an RRIF. A designated benefit has a similar definition as a refund of premiums, except that the form to file with CRA is Form 1090, Death of an RRIF Annuitant – Designated Benefit or Joint Designation on the Death of a PRPP Member.

Again, a qualifying survivor may defer paying tax on the designated benefit by transferring it to an RRSP or RRIF (or certain other registered accounts) of which they are annuitant, following similar rules as RRSPs.

Conclusion

While there is a lot of technical information above, here are two critical takeaways:

  1. Designating your spouse or financially dependent child or grandchild as beneficiary of your RRSP or RRIF can result in the deferral of income taxes on your death therefore it is important to name your beneficiaries in your Will or RRSP/RIFF contract, and
  2. If you don’t name your spouse or financially dependent child or grandchild as beneficiary of your RRSP or RRIF, the fair market value of your RRSP or RRIF at the time of your death will be reported as income on your final tax return. This can result in significant income taxes owing if the fair market value of your RRSP or RRIF is high. Therefore you should have a plan to withdraw from your RRSPs or RRIFs to reduce the balance after retirement.