How Are RRSPs and RRIFs Taxed When the Owner Dies in BC?

Registered plans are often the largest asset a person leaves behind, and they are taxed differently from a house or a bank account. If you are a spouse, a child or an executor, it helps to know early how the tax works and who is likely to feel it.

This article gives a general overview of the federal rules that apply in British Columbia. Your situation may turn on details such as who is named on the plan, so a lawyer or accountant can confirm how it applies to you.

This article covers the law of British Columbia.

The starting point: the plan is treated 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, unless it passes as a tax-deferred refund of premiums to a qualifying beneficiary. For a RRIF, the fair market value at death is likewise included in income for the year of death, unless a spousal rollover applies.

This is reported on the final return, which covers income from January 1 of the year of death up to the date of death. The legal representative is responsible for filing that return. Because it is one year's income, a large plan can push the final return into a high tax bracket, which is why rollovers matter.

Spouses and common-law partners: the rollover

If all of the RRSP 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 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 the 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 death. A spouse who is named successor annuitant simply continues to receive the 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.

Children, grandchildren and other beneficiaries

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

A 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.

Who bears the tax, and what happens after death

For a non-spouse beneficiary, the amount on the T4RSP (box 34) is reported on the deceased's return on line 12900. That means it is the final return, handled by the legal representative, that reports it. How the tax affects each beneficiary's share depends on the will and the plan's designations, so ask a lawyer if the estate has several beneficiaries.

Any increase in value between death and final distribution is taxed to the beneficiary or the estate for the year it is received. If total RRSP distributions turn out to be 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, generally if the final distribution occurs by the end of the year after the year of death.

For a RRIF, payments from January 1 to death go on line 11500 if the person was 65 or older, or if the payments were due to a spouse's death, or otherwise on line 13000.

What to do next

• Find the plan statements and check who the named beneficiary or successor annuitant is.
• Notify the CRA of the death as soon as possible.
• Do not distribute estate assets before considering a clearance certificate, because the legal representative can be personally liable for unpaid tax up to the value of the assets distributed.
• Watch the deadlines for rollovers, which run to the end of the year after death.
• Speak with a lawyer or accountant before moving money, since the choice of rollover or elections can change the tax.

Frequently asked questions