Does Naming a Beneficiary on an RRSP Avoid Probate in Canada?

Many people name a beneficiary on their RRSP hoping it will pass outside the will and avoid probate. That can be a sensible goal, but it mixes together two separate things: who receives the money, and who pays the tax.

This article focuses on the federal tax side, which applies across Canada, although provincial or territorial tax applies on top of federal tax. Quebec has its own withholding rates, so Quebec readers should confirm the details. Probate and creditor protection are matters of provincial or territorial law, so they are flagged here as questions to confirm with a lawyer.

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

Probate and tax are different questions

Probate is the court process that confirms an executor's authority over the estate. It is governed by provincial or territorial law, and the rules differ from one place to another, including Quebec. Whether a named beneficiary on an RRSP keeps the plan out of the estate for probate purposes, or out of reach of creditors, depends on where you live and how the designation was made. A lawyer in your province or territory can confirm this.

Federal income tax works differently. It applies across Canada, and it does not depend on whether the RRSP passes through the will.

What a designation does not change for tax

When the annuitant of an unmatured RRSP dies, the CRA treats the annuitant as having received, immediately before death, the fair market value of all property in the plan. This amount is reported on the final return.

Because of this deemed receipt, the deceased bears the tax on the full RRSP value even when a named beneficiary actually receives the money. The amount is added to the other income for the year of death and taxed at graduated rates. There are exceptions. The deemed receipt does not apply where a spouse or common-law partner is the sole beneficiary and all the property is rolled over by December 31 of the year following death. A qualifying survivor who receives a refund of premiums includes it in their own income, and can deduct it by transferring it to a registered plan, but the transfer must be completed in the year it is received or within 60 days after the end of that year. A transfer to an RRSP requires the survivor to be 71 or younger at the end of the year of the transfer; an older survivor transfers to a RRIF or annuity instead.

If the RRSP names the estate, or has no designated beneficiary, the whole fair market value is still the deceased's income on the final return, and the estate bears the tax. There is an exception: a payment to the estate can be a refund of premiums 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 on the final return.

When a designation does change the tax result

Who you name can matter a great deal for tax. A qualifying survivor is the deceased's spouse or common-law partner, or a financially dependent child or grandchild.

A financially dependent child or grandchild can roll over a refund of premiums even if the deceased left a spouse, but a non-dependent child or grandchild can only receive a taxable payment, not a rollover. A financially dependent child or grandchild who is not infirm can transfer a refund of premiums only to an eligible annuity that runs for not more than 18 years minus their age when it is bought, with payments starting no later than one year after purchase. Where there is a spouse and other beneficiaries, the spouse's share can be rolled over while the others' shares are included in the deceased's deemed income.

Creditors and the tax bill

Even if a designation helps a plan avoid the estate under your province's rules, the tax does not disappear. A non-annuitant who receives an RRSP amount is jointly and severally liable with the last annuitant for the part of the tax for the year of death attributable to that amount. This means beneficiaries can be pursued for the tax if the estate cannot pay.

For a RRIF, the same idea applies. The last annuitant is deemed to have received the fund's fair market value just before death, and a similar liability rule covers RRIF amounts. If a spouse is named as successor annuitant, no deemed receipt applies and the RRIF continues.

What to do next

• Check the plan contract and the will to see who is named and whether the estate is the beneficiary.
• Ask a lawyer in your province or territory whether the designation keeps the plan out of probate or away from creditors.
• Ask an accountant to estimate the final-return tax on the full RRSP value.
• Confirm whether any beneficiary is a qualifying survivor who could use a rollover.
• Ask a lawyer or accountant how the final-return tax will be paid, since a beneficiary who receives RRSP money can be liable for the part of the tax attributable to that amount.
• Review designations after marriage, separation or the birth of a child, since the named person affects the tax result.

Frequently asked questions