RRSP Beneficiary Rules When the Owner Dies in Ontario

When someone dies holding an RRSP, two questions come up quickly: who gets the money, and who pays the tax. The answers can be very different depending on who is named and how the money is moved.

This article walks through the general rules in Ontario and the main federal tax rollovers. Details can change with the plan contract and the year, so treat it as a starting point.

Who receives the RRSP

Under the Succession Law Reform Act, a participant may designate a person to receive the benefit payable on the participant's death. The plan administrator is discharged on paying the benefit to the person designated, and that person may enforce payment.

For Estate Administration Tax, the estate value excludes registered plans such as RRSPs, RRIFs and TFSAs that have a beneficiary designation. That means a designated RRSP generally does not add to probate tax, which is $15 for every $1,000 over $50,000 of the estate's value.

An RRSP held with an insurance company can be different. The plan-designation rules in Part III of the Succession Law Reform Act do not apply to a designation to which the Insurance Act applies, such as an insurance-company RRSP or annuity. If you are unsure which rules govern a plan, the contract and a lawyer can confirm.

How the RRSP is taxed on death

For an unmatured RRSP, the annuitant is considered to have received, immediately before death, the fair market value of all property in the plan, and that amount is taxed on the deceased's final return. Income earned in the plan after death is taxed to the designated beneficiary or the estate in the year it is received, not to the deceased.

Rollovers for a spouse or dependent child

A qualifying survivor who receives a refund of premiums may defer tax by transferring the amount to their own RRSP, RRIF or an annuity. Qualifying survivors are the spouse or common-law partner and a financially dependent child or grandchild.

For a child or grandchild, the usual test is that they lived with and depended on the annuitant and had net income the previous year below the unreduced maximum basic personal amount. A higher threshold applies if the dependence was due to mental or physical infirmity. The basic personal amount changes each year, so confirm the current figure with the CRA.

• Child or grandchild dependent but not because of an impairment: tax can be deferred only by buying a term annuity running for not more than 18 years minus the child's age when it is bought.
• Infirm child or grandchild: proceeds can be rolled into the RDSP of a financially dependent infirm child or grandchild, up to the RDSP lifetime limit of $200,000, using Form RC4625.
• Estate named as beneficiary: an amount paid to the estate can still be a refund of premiums if a qualifying survivor is also a beneficiary of the estate and the legal representative and the survivor jointly file Form T2019.

How RRIFs and TFSAs differ

If a RRIF contract or the will names the spouse or common-law partner as successor annuitant, the deceased is not treated as receiving the RRIF value at death, and the spouse reports the payments they receive. A spouse who is not named can still become successor annuitant if the legal representative consents and the RRIF carrier agrees.

With a RRIF that has only a named beneficiary, the deceased is generally treated as receiving the fair market value of the property held in it. Amounts paid to a qualifying survivor can be treated as a designated benefit, which reduces the amount taxed to the deceased.

A TFSA is simpler: a designated beneficiary does not pay tax on amounts received up to the TFSA's fair market value at death, though earnings after the date of death are taxable.

What to do next

• Get the plan statement and the beneficiary designation on file with the financial institution.
• Note whether the plan is held with an insurance company, a bank or a trust company.
• Identify whether the beneficiary is a spouse, common-law partner or financially dependent child or grandchild, since that drives the rollover options.
• Ask the accountant preparing the final return to confirm the deadlines and forms, because several figures change each year.
• Before the estate trustee distributes property, obtain a CRA clearance certificate (Form TX19), since distributing without one can create personal liability for unpaid amounts up to the value of the assets distributed.

Frequently asked questions