RRSP Tax at Death in Canada: How Deemed Income and Rollovers Work

When someone dies holding an RRSP, the tax bill often surprises families. The money is not taxed as it is paid out to you in the usual way. Instead, the tax authorities treat the plan as having been cashed in at death, and the tax falls on the deceased's final return.

This article is for estate trustees and surviving spouses who need to understand the basics: how the plan is taxed, when a rollover applies, and what else needs reporting. Every estate is different, so use this as a map and confirm the details with an accountant or lawyer.

How an unmatured RRSP is taxed at death

An unmatured RRSP is one that has not yet been turned into an income stream. At death, the fair market value of the property held in the plan at the time of death is included in the deceased annuitant's income for the year of death.

The amount is reported on a T4RSP slip, in box 34. Because it is added to the other income for that year, a large RRSP can push the final return into a higher bracket. That is why the rollover rules below matter so much.

Who receives the money and why it matters

If the plan has a named beneficiary, the plan administrator is discharged by paying the person named in the latest designation, and that person can enforce payment. A later designation revokes an earlier one to the extent they conflict.

The Ontario Court of Appeal has held that RRSP proceeds paid to a designated beneficiary are removed from the owner's estate and are not available to the estate's creditors. A named beneficiary is not a complete shield, though. Amounts payable under a beneficiary designation are treated as part of the estate when a dependant makes a support claim.

A practical point: the tax is on the deceased's final return even when the money goes straight to a named beneficiary. The estate trustee is responsible for paying taxes and other debts, so talk early with the beneficiary and your accountant about how the tax will be funded.

Rollovers that can reduce the tax

If all of the RRSP property is paid to the surviving spouse or common-law partner and transferred to their RRSP by the end of the year following the year of death, the spouse claims a deduction on line 20800. If it goes to their RRIF or an eligible annuity, the deduction is on line 23200. The amount reported on the deceased's final return is reduced accordingly.

A financially dependent child or grandchild, or their estate, who receives RRSP amounts can reduce the amount taxed on the deceased's final return. Form T2019 is used, and Information Sheet RC4177 gives the detail. If the value drops between death and the final distribution, Form RC249 deals with that.

Plans that have already matured, and other reporting

If the RRSP has already become an annuity, the fair market value of the RRSP property at death is included in the deceased's income for the year of death. If the spouse or common-law partner is the beneficiary, payments continue to them. If the spouse is a beneficiary of the estate, they and the legal representative can jointly elect in writing to treat the amounts as paid to the spouse. For other beneficiaries the annuity is commuted.

RRIFs are often discussed alongside RRSPs, and the rules depend on the plan terms and who is named. Ask your accountant to confirm how a particular RRIF is treated.

• Income earned in a registered plan after death is reported on a T4RSP in the name of the beneficiary or the estate, in box 28, not on the final return.
• Home Buyers' Plan and Lifelong Learning Plan balances may also need to be reported as income on the final return.

What to do next

• Find out whether each plan has a named beneficiary and get the latest designation form.
• Ask each plan issuer for the value at the date of death.
• Identify whether a spouse, common-law partner or financially dependent child or grandchild is receiving money.
• Note the year-end cut-off for a spousal rollover and plan the transfer well before it.
• Hold back enough to cover the tax before distributing, because a trustee who distributes before getting a CRA clearance certificate can be personally liable for unpaid tax, up to the value of what was distributed.
• Speak with an accountant or lawyer before filing the final return.

Frequently asked questions