Tax on an RRSP When Someone Dies Without a Will in Ontario

If you are administering the estate of someone who died without a will, the RRSP or RRIF can be the largest asset and the one with the biggest tax consequences. Many administrators are surprised to learn that the plan is generally treated as cashed out at death, even if nobody has actually withdrawn anything.

This article explains in plain language how the deemed income works, who is taxed, and when a rollover can reduce or delay the bill. Every estate is different, so use this as a map for the questions to ask an accountant or lawyer, not as a calculation of your own numbers.

What happens to an RRSP at death

Under the Income Tax Act, when an RRSP annuitant dies before the plan matures, the annuitant is deemed to have received, immediately before death, a benefit equal to the value of the RRSP's property at death. CRA says this is the fair market value of all property in the RRSP at death, and it is reported on the final return for the year of death.

For a RRIF the idea is similar: the amount included in the deceased's income at death is the fair market value of the RRIF at that time. The key point is that the tax event happens because of the death, whether or not the money has been paid out yet.

Dying without a will does not change this tax rule. What it can change is who ends up with the money, which is why the beneficiary question matters so much.

Is there a named beneficiary?

In Ontario, a plan participant can name a beneficiary by a signed instrument or by will, and a will designation works only if it expressly relates to a plan, generally or specifically. If the deceased signed a designation under the plan, the plan administrator is discharged by paying the person named in the latest designation, unless it had actual notice of a later designation or revocation.

So even when there is no will, a valid designation on the plan itself can send the money directly to the named person, outside the estate. A later designation revokes an earlier one to the extent they are inconsistent. If there is no valid designation, the proceeds are generally paid to the estate, and the administrator has to deal with them.

Before assuming anything, ask the financial institution for the plan's current designation and the date of the account statement closest to death. Whether a designation is valid is a question of the plan's terms and the law, and a lawyer can confirm it.

Who is taxed, and what a rollover can do

The deemed amount is reported on the deceased's final return. A rollover can change this. A refund of premiums paid to a qualifying survivor can be deducted from the deceased's deemed income and taxed in the survivor's hands instead. It may also be transferred tax-deferred to the survivor's RRSP, RRIF, PRPP, SPP or an eligible annuity.

A qualifying survivor is the deceased's spouse or common-law partner, or a financially dependent child or grandchild. The Income Tax Act defines a refund of premiums as an amount paid from the RRSP because of the annuitant's death to a surviving spouse or common-law partner (where the plan had not matured) or to a financially dependent child or grandchild.

Notice that the tax definition includes common-law partners. That is different from intestacy rules, where an unmarried common-law partner is not a spouse. A common-law partner may qualify for the tax rollover even though they would not inherit under the intestacy rules.

Deadlines and limits for the rollover

• A spouse who is sole beneficiary must move all the RRSP property to a qualifying plan or annuity by December 31 of the year following the year of death.
• For a refund of premiums, the transfer must be made in the year it is received or within 60 days after the end of that year.
• To transfer into an RRSP, the survivor must be 71 or younger at the end of the year of the transfer.
• For a RRIF, a qualified beneficiary may move a refund of premiums to an RRSP only if 71 or younger, in the year received or within 60 days after year end.

If the refund is paid to the estate rather than directly to the survivor, the legal representative and the survivor must jointly file Form T2019 for it to count as a refund of premiums. That is one reason to speak to an accountant before the estate distributes anything.

Income earned after death and creditors

Income earned in the RRSP after death is included in the income of the designated beneficiaries or, if there is no designated beneficiary, of the estate, for the year it is received. Beneficiaries are not taxed again on amounts reasonably regarded as already included in the deceased's income. For a RRIF, a T4RIF may be issued for growth between death and final payout, generally taxable to the beneficiary or estate.

Creditor questions are harder. In bankruptcy, RRSP balances are exempt from seizure except for contributions made in the 12 months before bankruptcy. Whether an RRSP with a named beneficiary is protected from the deceased's other debts depends on the facts, and you should confirm it before paying out.

What to do next

• Ask each financial institution for the plan type (RRSP or RRIF), its value at the date of death, and the current beneficiary designation.
• Find out whether there is a spouse, common-law partner, or financially dependent child or grandchild who might be a qualifying survivor.
• Note the rollover dates early, especially December 31 of the year after death for a sole-beneficiary spouse.
• Speak with an accountant about the final return before the estate distributes money, and with a lawyer about who is entitled to the plan.

Frequently asked questions