RRSP or RRIF Rollover to a Financially Dependent Child in Canada

When a parent dies holding an RRSP or RRIF, the tax bill can be large. Many families do not realize that a child or grandchild who depended on the parent may be able to take the money in a way that defers the tax.

This article explains who counts as a financially dependent child or grandchild, how the rollover works, and what an executor should check first. It is general information, and the details of your situation matter.

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

Why a rollover matters

When the annuitant of an unmatured RRSP dies, the CRA treats the annuitant as having received the fair market value of all property in the plan immediately before death, and that amount is reported on the final return. The deceased bears that tax even when a named beneficiary actually receives the money, unless a qualifying survivor receives a refund of premiums.

A refund-of-premiums rollover to a qualifying survivor is one way the tax can be moved off the final return. The deemed amount can be reduced by the refund of premiums paid to qualifying survivors, which lowers the income on the final return. For a RRIF, a beneficiary can defer tax only if they are a qualifying survivor who rolls over the refund of premiums.

Who counts as a financially dependent child or grandchild

A qualifying survivor is the deceased's spouse or common-law partner, or a financially dependent child or grandchild. In the Income Tax Act, a refund of premiums includes an amount paid because of the annuitant's death to a child or grandchild who was financially dependent on the annuitant for support.

For a child or grandchild who is not disabled, the CRA looks at two things: the person must have ordinarily resided with and depended on the annuitant, and the person's net income for the year before death must be less than the unreduced maximum basic personal amount.

A child or grandchild who is not dependent can receive amounts only as a taxable payment, not as a rollover.

How the annuity rollover works

A financially dependent child or grandchild who is not infirm can transfer a refund of premiums only to an eligible annuity. The annuity must run for not more than 18 years minus the child's or grandchild's age when it is bought, and payments must start no later than one year after purchase.

The child includes the refund of premiums in their own income, and a child who is not infirm can deduct it by transferring it to an eligible annuity. A child or grandchild who is dependent because of impairment in physical or mental functions may instead have proceeds rolled over to their RDSP, subject to the $200,000 lifetime RDSP limit. 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, but a financially dependent child or grandchild who is not infirm can transfer only to an eligible annuity.

A dependent child or grandchild may roll over a refund of premiums even if the deceased left a spouse or common-law partner. Where there is a spouse and other beneficiaries, each recipient gets a T4RSP for their share, and the final return shows the deemed amount reduced for amounts rolled to qualifying survivors.

When the money is paid to the estate

If the RRSP names the estate, or has no designated beneficiary, the whole fair market value is the deceased's income on the final return. There is an exception: a payment to the estate 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.

The Act lets the legal representative and an individual jointly designate, in the prescribed form, that a payment is a refund of premiums, and the amount is then deemed received by that individual. For a RRIF paid to the estate, a joint designation on Form T1090 lets a qualifying survivor be taxed on the amounts.

What to do next

• Find the RRSP or RRIF contract and any beneficiary designation, and check the will.
• Gather proof of where the child lived and how the parent supported them.
• Get the child's net income for the year before death.
• Confirm the annuity terms with the issuer before buying, including the maximum term.
• Note the deadline: 60 days after the end of the year the refund is received.
• Speak with a lawyer or accountant before the estate pays out, especially if the money is going to the estate.

Frequently asked questions