RRSP and RRIF Taxes at Death in Ontario: Who Pays?

A large RRSP or RRIF can be the biggest asset a person leaves behind, and also the biggest tax surprise. Many families assume the money simply passes to the person named on the form, and that the tax is that person's problem. In practice, the tax is usually dealt with on the deceased person's own final return, which the estate is responsible for filing.

This article explains how an RRSP is taxed at death, what changes when a spouse or dependent child is the survivor, how a named beneficiary affects the estate, and where the tax bill lands. Your own situation will depend on the plan, the beneficiary designation and the rest of the estate, so treat this as a starting point for a conversation with a lawyer or accountant.

How an RRSP is taxed on death

For an unmatured RRSP, the person who died is considered to have received, immediately before death, an amount equal to the fair market value of everything in the plan. That amount is included in income on the final return for the year of death. It is reported on a T4RSP and entered on line 12900.

The legal representative files that return, and a final T1 return must be filed for every person who dies. Because the whole plan value lands in one tax year, a large RRSP can push the final return into much higher tax brackets than the person ever paid during life. That is why the size of the plan matters so much.

RRIFs follow their own rules and the details differ from an RRSP. For the person who receives RRIF amounts, a surviving spouse, or a recipient aged 65 or older at December 31, uses line 11500, while other recipients under 65 use line 13000. An accountant can confirm how a particular RRIF should be reported.

When a spouse or dependent child is the survivor

There is relief when the survivor is a qualifying one. A refund of premiums paid to a spouse or common-law partner, or to a financially dependent child or grandchild, can reduce the amount taxed in the deceased person's final return. That income is then taxed to the survivor instead.

The survivor may be able to transfer the refund of premiums to an RRSP, RRIF or similar plan and claim an offsetting deduction. The legal representative and the survivor use Form T2019 to make the designation. There are age and timing limits. A transfer to a qualified beneficiary's RRSP is only possible if that person is 71 or younger at the end of the transfer year, and it must be completed in the year the amount is received or within 60 days after year-end.

Named beneficiary or not: what it changes

A beneficiary designation mainly affects who receives the money and how it moves. It does not make the income tax disappear. The deemed receipt of the plan's value still happens on the final return unless the survivor relief above applies.

Where it does help is Ontario Estate Administration Tax. The value of an estate for that tax includes RRSPs and RRIFs that have no beneficiary designation. It excludes assets with a named beneficiary. So a plan with a valid named beneficiary generally does not add to the estate value used to calculate that tax, while a plan with no named beneficiary does.

• Named beneficiary: usually passes outside the estate, and is excluded from the value for Ontario Estate Administration Tax.
• No named beneficiary: the plan value is part of the estate and counts toward that tax.
• In both cases, the plan's value is generally included in income on the final return unless relief for a qualifying survivor applies.

Who actually bears the tax

The tax is calculated on the deceased person's final return, so the legal representative is the person who deals with the CRA. If the plan passes to a named beneficiary and the rest of the estate is small, the estate may not have enough cash to pay the bill. This is a common source of family disputes.

Whether the estate can recover the tax from the beneficiary, or whether the other beneficiaries bear it, depends on the will, the designation and the facts. It is worth getting legal advice before paying out or distributing anything. Note also that probate fees, funeral expenses and fees to administer the estate cannot be deducted as personal expenses on the deceased's returns.

Timing matters too. For a death between January 1 and October 31, the final return is due April 30 of the following year. For a death on November 1 to December 31, it is due six months after the date of death. A late return can bring a penalty of 5% of the balance owing plus 1% for each full month late, up to 12 months, and the CRA also charges compound daily interest.

Practical steps for the legal representative

• Find every RRSP and RRIF and confirm whether each has a named beneficiary.
• Ask the financial institution for the plan's value at the date of death and the T4RSP information.
• Work out whether a spouse or dependent child may qualify for a refund of premiums and Form T2019.
• Estimate the tax on the final return before distributing any money.
• Obtain a clearance certificate before distributing property, because a representative who distributes without one can be personally liable up to the value distributed.
• Speak to a lawyer or accountant if the plan is large, the beneficiaries disagree, or the estate may not have enough cash.

A clearance certificate should be requested only after the returns are filed and assessed and the taxes are paid or secured. Do not submit the request together with the returns.

Frequently asked questions