Over the last two years, the effects of COVID on healthcare, businesses, and financial assets have highlighted the importance of planning. Many investors may acknowledge that estate planning is important but not everyone can carve out time to do it.  To get the process underway, we recommend starting with the relatively simpler aspects of estate planning. Reviewing one’s RRSP beneficiary designations is a clear example of such.

When one passes away and has an RRSP or RRIF, they are deemed by the CRA to have received the fair market value (FMV) of the accounts at the time of death. Hence, this value is included as income in their final tax return and taxed at their marginal rate. However, there are exceptions to this as designating a spouse as a beneficiary on the plan documentation allows a tax-free rollover to a spouse to defer taxes and avoid probate.  If someone other than a spouse is designated as a beneficiary, the tax will have to be paid but probate fees can still be avoided. Investors may choose to name a RRSP beneficiary in their will, however, they would be exposed to probate fees. Therefore, most investors opt to use the plan documentation as offered by their financial institution to name beneficiaries.

Designating a Spouse

When a spouse (legally married or common-law partner) is designated as beneficiary they may transfer the assets to their RRSP if they are 71 years of age or younger by the end of the year the transfer is made. Another option is to transfer the funds to an issuer to purchase an eligible annuity. These transfers must be made by December 31 of the year after one’s death. In both cases, the tax on the amount transferred is deferred until the spouse withdraws the money from their RRSP/RRIF or receives a payment from the annuity.

For a RRIF, there is the additional option of naming a spouse as a successor annuitant. When you name a spouse as a successor annuitant, the RRIF continues to exist after one’s death and the spouse becomes the annuitant. All payments made from the RRIF after one’s death will be paid out and taxed in the spouse’s hands.

The benefit of these tax deferral strategies is that the value of the deceased person’s RRSP or RRIF can be included in the spouse’s taxable income over a period of time rather than being taxed all at once in the deceased’s terminal tax return. The spouse may also be in a lower tax bracket than the deceased and the assets will continue to benefit from tax-deferred growth.

Designating a Non-Spouse

Investors can designate any individual or registered charity as a beneficiary to their RRSP and RRIF. If a non-spouse is designated, the RRSP/RRIF will be deregistered on their death and the fair market value (FMV) will be transferred to the beneficiary. The estate will still be responsible for paying taxes on the FMV of the accounts so there should be liquidity in the estate to pay those taxes.

Estate planning is a topic that some may try to avoid, but making these decisions early can have a large impact on your beneficiaries. A New Year is a good time to begin taking estate planning seriously. This blog provides a quick overview of beneficiary designations and estate planning in a RRSP/RRIF. For a more personal and nuanced discussion please speak to your advisor.