How to Use a Refund of Premiums to Buy an Annuity in Canada

If someone leaves you money from their RRSP, you may be able to avoid paying tax on it right away. The tool for this is called a refund of premiums, and it is only open to certain family members.

This article explains who qualifies, where the money can go and the deadlines to watch. Details turn on the facts, so a lawyer or accountant should confirm your situation.

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

What a refund of premiums is

A refund of premiums is an amount paid out of an RRSP because of the annuitant's death, to a spouse or common-law partner of the annuitant immediately before death, or to a child or grandchild financially dependent on the annuitant for support. These people are called qualifying survivors.

The qualifying survivor includes the amount in their own income, but can deduct it by transferring it to their own RRSP, or to a RRIF, RDSP or annuity. The deceased's final-return income is then lowered by the refund of premiums paid to qualifying survivors.

This matters because of how an RRSP is taxed at death. The CRA treats the annuitant as having received, immediately before death, an amount equal to the fair market value of all property held in the RRSP, and that amount is reported on the final return. As a result, the deceased bears the tax on the full RRSP value even when a named beneficiary actually receives the money, unless the beneficiary is a qualifying survivor who receives a refund of premiums.

A spouse or common-law partner

A surviving spouse or common-law partner can transfer the refund to their own RRSP, claimed on line 20800 with Schedule 7, or to a RRIF, RDSP or annuity, claimed on line 23200. Form line numbers can change, so check the current guide.

Timing matters. The transfer must be completed in the year the amount is received or within 60 days after the end of that year. A transfer to an RRSP also requires the survivor to be 71 or younger at the end of the year of the transfer. A survivor past that age cannot roll into an RRSP and instead transfers to a RRIF or annuity.

There is also a separate spousal rule. The deemed receipt does not apply where the spouse or common-law partner is designated in the RRSP contract or the will as sole beneficiary and all property is transferred to the spouse's RRSP or RRIF, or otherwise rolled over, by December 31 of the year following the year of death; the spouse then reports the amount received. Where there is a surviving spouse and other beneficiaries, the spouse's share can be rolled over while the other beneficiaries' shares are included in the deceased's deemed income.

A child or grandchild

A child or grandchild who is not disabled generally qualifies only if they ordinarily resided with and depended on the annuitant, and their net income for the year before death was less than the unreduced maximum basic personal amount. For a child or grandchild with a mental or physical infirmity, the income limit is higher: the basic personal amount plus the disability amount.

A financially dependent child or grandchild may roll over a refund of premiums even if the deceased left a spouse or common-law partner. A non-dependent child or grandchild can receive amounts only as a taxable payment, not as a rollover.

Where the money can go

For a child or grandchild who is not infirm, the annuity must run for not more than 18 years minus their age when it is bought, with payments starting no later than one year after purchase. Non-resident dependants may qualify if they received significant financial support from the annuitant, but a written request to the CRA tax services office is needed.

If the RRSP is paid to the estate, the payment is a refund of premiums only if a qualifying survivor is a beneficiary of the estate and the legal representative and the survivor jointly file Form T2019, which lets the income be taxed to the survivor instead of the final return.

What to do next

• Confirm whether the money is being paid directly to you or to the estate; an estate payment needs extra steps to qualify.
• Note the year you receive the money and the 60-day deadline after the end of that year.
• Check your age against the RRSP age limit before choosing where to transfer.
• Speak with the plan issuer about annuity terms before you buy.
• Ask an accountant how the deduction will appear on your return.

Frequently asked questions