Executor Liability for Unpaid Tax on an Inherited RRSP in Canada

You are the executor, and the RRSP is going straight to a named beneficiary. The estate may not have enough cash left to pay the income tax that the RRSP creates. It is natural to ask whether you, or the beneficiary, can be left holding the bill.

This article explains where the tax falls, what the Income Tax Act says about recipients being liable, and what to check before money leaves the estate. It does not replace advice on your own situation.

This article covers Canadian federal tax law, which applies in every province.

Why the tax lands on the final return

When the holder of an unmatured RRSP dies, the CRA treats them as having received, just before death, an amount equal to the fair market value of everything in the plan, and that amount is reported on the final return. The deceased bears the tax on the full RRSP value even when a named beneficiary actually receives the money, unless that person is a qualifying survivor who receives a refund of premiums.

The amount is added to the deceased's other income for the year of death and taxed at graduated rates. Provincial or territorial tax applies on top of the federal tax. If the RRSP names the estate, or has no designated beneficiary, the whole value is the deceased's income and the payment forms part of the estate that bears the tax.

Can beneficiaries or the executor be liable?

Section 160.2(1) of the Income Tax Act makes a person who receives an RRSP amount, and who was not the annuitant, jointly and severally liable with the last annuitant for the part of the tax for the year of death that comes from that amount. Section 160.2(2) does the same for a RRIF. In practice, beneficiaries can be pursued for the tax if the estate cannot pay it.

The rules on an executor's own personal exposure, including how far a clearance certificate protects you, depend on the facts and the steps you take. Confirm them with a lawyer or accountant before you pay out the estate.

Where the bill can be reduced or moved

• A spouse or common-law partner named as sole beneficiary who rolls all the property into their own RRSP or RRIF by December 31 of the year after death avoids the deemed receipt, and the spouse reports the amount instead.
• A qualifying survivor who receives a refund of premiums reports it in their own income and can deduct it by transferring it to a registered plan.
• A payment to the estate counts as a refund of premiums only if a qualifying survivor is an estate beneficiary and the legal representative and survivor jointly file Form T2019.
• If the plan loses value between death and final payout, the legal representative can ask for the decrease to be deducted on the final return, using Form RC249 and a reassessment.

The decrease-in-value deduction is generally unavailable if the plan held a non-qualified investment after death, or if the final payment is made after the end of the year following the year of death, although the CRA may waive that case by case.

Withholding is not the final tax

Tax withheld when a lump sum is paid out may not cover the tax actually owing, because the withholding rate is not the bracket rate. The balance is payable when the income is reported. So a payout that has had tax withheld can still leave the final return with a balance owing.

What to do next

• Find out who is named on each RRSP and RRIF, and whether the estate is the beneficiary.
• Estimate the final-return tax before distributing anything.
• Ask whether any beneficiary is a qualifying survivor who could roll the funds over.
• Confirm with a lawyer or accountant how a clearance certificate fits your timing before you make final distributions.
• Keep records of every payout and any T4RSP or T4RIF slips issued.

Frequently asked questions