How Are a Deceased Person's RRSP and RRIF Taxed in BC?

When someone dies owning an RRSP or RRIF, many families assume the money simply passes on. For tax purposes, though, the plan's value is usually counted as income on the deceased's final return unless a rollover applies.

If you are the executor, you will be the one reporting it. If you are a beneficiary, it helps to know why the amount you receive may be smaller than the plan's value, and when a rollover can defer the tax.

This article covers the law of British Columbia.

The default rule: the plan counts as income at death

For an unmatured RRSP, the fair market value of the plan's property at death is included in the deceased's income for the year of death, reported on line 12900, unless it passes as a tax-deferred refund of premiums to a qualifying beneficiary.

A RRIF works in a similar way. Unless a spousal rollover applies, the fair market value at death (T4RIF box 18) is included in the deceased's income for the year of death. Payments received from January 1 up to death go on line 11500 if the person was 65 or older or the payments were due to a spouse's death, or on line 13000 otherwise.

This income lands on the final return, which covers income from January 1 of the year of death up to the date of death. Because it is added to the person's other income for that year, a large plan can push the return into a higher tax bracket.

Rollover to a spouse or common-law partner

For an RRSP, if all of the plan's property goes directly to the spouse's or common-law partner's RRSP, RRIF, PRPP, SPP or eligible annuity before the end of the year after the death, no T4RSP is issued in the deceased's name. The spouse reports the payment and deducts the amount transferred.

For a RRIF, no T4RIF at fair market value is issued in the deceased's name if all property goes to the spouse or common-law partner, the entire eligible amount is transferred directly to their plan, and everything is distributed before the end of the year after the death. If the spouse was named successor annuitant, they simply continue receiving payments as the new annuitant.

If the spouse is the estate's beneficiary rather than the named beneficiary of the plan, the spouse and the legal representative can jointly elect in writing, on Form T2019, to treat the estate's RRSP amounts as paid to the spouse.

Dependent children and grandchildren

A financially dependent child or grandchild, dependent because of an impairment in physical or mental functions, can also receive a refund of premiums tax-deferred. A child or grandchild who is not dependent in that way can only transfer to a term annuity.

The refund of premiums must be transferred to the qualified beneficiary's RRSP in the year it is received or within 60 days after the end of that year, and the beneficiary must be 71 or younger at the end of the year of transfer.

Growth after death and the loss deduction

The deceased is taxed on the fair market value at death. A non-spouse beneficiary's amount (T4RSP box 34) is reported on the deceased's return on line 12900, and any increase in value between death and final distribution is taxed to the beneficiary or the estate for the year it is received.

If the plan loses value and total distributions are less than the fair market value included in the deceased's income, the legal representative can request a deduction of the difference on the final return. This generally applies if the final distribution occurs by the end of the year after the year of death.

• Value at death is taxed to the deceased.
• Growth afterwards is taxed to whoever receives it.
• A shortfall may be deducted if the final distribution is timely.

Why this matters for the executor, and next steps

The legal representative must file the final return, and any T3 returns if required. Because the RRSP or RRIF income sits on that return, it can create a large balance owing.

Before distributing estate assets, the representative should apply for a clearance certificate. If assets are distributed without one and tax is owing, the representative can be held personally liable for outstanding tax, up to the value of the assets distributed. The certificate is requested on Form TX19.

• Get the plan's value at the date of death from the financial institution.
• Confirm who receives the plan and whether a rollover is available.
• Watch the deadlines: the end of the year after death for spousal rollovers, and 60 days after year-end for refunds of premiums.
• Ask whether a T2019 election applies if the spouse inherits through the estate.
• Keep funds back for the tax before distributing.
• Speak with a lawyer or accountant before making the final distributions.

Frequently asked questions