How an Inherited RRSP Is Taxed on the Final Return in Ontario

When someone dies holding an RRSP, many heirs assume the tax bill belongs to whoever receives the money. In general it does not work that way. The tax rules treat the RRSP as if the person cashed it in at death, and that creates income on their last tax return.

If you are the estate trustee or a beneficiary, it helps to know where the RRSP amount shows up, who carries the tax, and what options exist to move the tax to a surviving spouse or dependant. This article walks through those points in plain language.

The RRSP is treated as income at death

For an unmatured RRSP, the annuitant is considered to have received, just before death, the fair market value of all the property in the plan. That amount is included in the deceased's income on the return for the year of death.

For a matured RRSP, the amount is the fair market value of the remaining annuity payments.

This can create a large amount of income in one year, which is why the RRSP is often the biggest driver of the tax owing on a final return. The deemed amount is a tax concept: it does not mean the money has been paid out to anyone yet.

Who actually pays the tax

The deemed income is taxed on the deceased's final return, so the estate's final T1 bears the tax, whoever receives the RRSP money. The T4RSP issued in the deceased's name reports the fair market value at death in box 34.

That matters when a named beneficiary receives the RRSP directly. The beneficiary may receive the full amount, while the estate is left to pay tax on it from other assets. If the estate does not have enough other money, it can create real friction among beneficiaries, so the trustee should look at this early.

Income the RRSP earns after death is a separate matter. That income is taxed to the designated beneficiary, or to the estate if there is no beneficiary, in the year it is received. It appears on a T4RSP, in box 28 for most beneficiaries and estates, or box 18 for a spouse who is beneficiary of an unmatured RRSP.

Moving the tax to a spouse or dependant

There is a way to reduce what is reported on the final return. Qualifying survivors for the refund-of-premiums reduction are a spouse or common-law partner, or a child or grandchild who was financially dependent on the annuitant at death. When a refund of premiums is paid to a qualifying survivor, the legal representative can reduce the amount reported on the final return, which shifts the tax to the survivor.

If the RRSP funds are paid to the estate and a qualifying survivor is a beneficiary of the estate, the legal representative and the survivor can jointly file Form T2019 to treat all or part of the amount as received by the survivor.

The survivor may also be able to transfer the refund into their own RRSP, PRPP or SPP (deduction on line 20800), or into a RRIF, RDSP or annuity (line 23200). That transfer must be completed in the year the refund is received or within 60 days after the end of that year.

Withholding when the money is paid out

CRA publishes withholding rates for RRSP withdrawals paid to residents of Canada outside Quebec: 10% up to $5,000, 20% over $5,000 up to and including $15,000, and 30% over $15,000. Quebec rates are 5%, 10% and 15%, and non-residents are generally 25% unless a treaty reduces it.

Those rates are published for lifetime withdrawals. How withholding applies to a payout on death is something to confirm with the plan issuer before you rely on any figure.

Whatever is withheld at payout is not the same thing as the final tax bill. The actual tax is worked out on the final return, so the amount withheld may be more or less than what is ultimately owed.

What to do next

• Ask each financial institution whether the RRSP or RRIF has a named beneficiary and what the fair market value was at death.
• Confirm whether a spouse, common-law partner, or financially dependent child or grandchild exists who could be a qualifying survivor.
• Ask the plan issuer how withholding applies to a payout after death and when T4RSP slips will be issued.
• Estimate the tax on the final return so the estate keeps enough money to pay it.
• Talk to a lawyer or accountant before filing T2019 or choosing a transfer, since the deadlines are short.

Frequently asked questions