What If Your RRSP Value Drops After the Date of Death in Canada?

Markets do not pause while an estate is being settled. If an RRSP drops in value between the date of death and the final payout, the tax bill can end up larger than the money actually received.

This article explains why the tax is based on the value at death, what relief exists when the value falls, the limits on that relief, and what executors and beneficiaries can do. It is general information, and a lawyer or accountant can confirm how it applies to your case.

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

Why the value at death sets the tax

When the annuitant of an unmatured RRSP dies, the CRA treats the annuitant as having received, immediately before death, an amount equal to the fair market value of all property in the plan at death. That amount is reported on the final return.

The deemed amount is added to the deceased's other income and taxed at graduated rates. The tax is fixed by the value at death, which is why a later fall in value does not automatically reduce it.

If the estate is the beneficiary, the amount paid to the estate forms part of the estate that bears the tax. So a drop in value can leave the estate with less cash than the tax calculated on the final return.

The relief: carrying the decrease back

If the plan falls in value between death and final distribution, the legal representative can ask that the decrease be carried back and deducted on the deceased's final return, by filing Form RC249 and requesting a reassessment.

The CRA's example is simple. The plan was worth $185,000 at death and $150,000 was received, so the decrease is $35,000, which is a $35,000 deduction on line 23200.

How you claim depends on timing. If the final distribution is made in the year of death, the deduction is claimed on line 23200 of the final return. Reduction claims for a decrease in value made in the year of death need a letter attached to the return, while later claims need a letter to the CRA.

When the relief is not available

The relief has limits, and missing them is a common problem. Consider these situations:

• The decrease-in-value deduction is generally unavailable if the plan held a non-qualified investment after death.
• It is also generally unavailable if the final distribution is made after the end of the year following the year of death, although the CRA may waive this case by case.
• No deduction is available when the amount was never included in the deceased's income, for example where the full amount was rolled to the spouse.

The statutory rules are in s. 146(8.92) to (8.93) of the Income Tax Act. Because the timing rule runs from the end of the year after death, an executor who delays the final distribution can lose the claim.

What about increases in value?

The rule works in only one direction on the deceased's return. An increase in value after death is included in the income of the beneficiary or estate that receives it, for the year it is received. Income from the plan paid after death is likewise included in the income of the designated beneficiaries or the estate.

What to do next

• Get a statement showing the plan's value on the date of death.
• Keep records of every payout, with dates and amounts, until the plan is closed.
• Check whether the plan holds any non-qualified investment and ask the issuer about it.
• Aim to complete the final distribution by the end of the year following the year of death.
• Consider asking a lawyer or accountant to prepare the RC249 request and the supporting letter.

Tax withheld on a payout may not cover the tax actually owing, so keep enough in the estate for the balance. Beneficiaries who receive RRSP money can also be liable for the related tax if the estate cannot pay.

Frequently asked questions