RRSP Value Drops After Death: Can the Final Return Be Reduced in Canada?

Markets do not pause when someone dies. An RRSP can lose value in the weeks or months it takes to settle the estate, and the amount that finally reaches the beneficiaries or the estate may be well below what the account was worth on the date of death.

If you are the executor, that gap raises a hard question: is tax calculated on the higher value or the lower one? This article explains how the CRA sets the income, what relief exists for a drop in value, and where that relief stops.

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

How the taxable amount is set at death

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. The Income Tax Act sets this out in s. 146(8.8), with some reductions for amounts payable to a surviving spouse or common-law partner.

That amount is added to the deceased's other income for the year of death and taxed at graduated rates. The deceased generally bears that tax even when a named beneficiary is the one who actually receives the money, unless the recipient is a qualifying survivor who receives a refund of premiums. Where a spouse or common-law partner is the sole beneficiary and all the property is transferred to their RRSP or RRIF (or otherwise rolled over) by December 31 of the year following the year of death, the deemed receipt does not apply and the spouse reports the amount received. So the starting point is the value on the date of death, whatever happens to the investments afterwards.

What happens when the value falls

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

The CRA's own example shows how it works. The plan was worth $185,000 at death and $150,000 was received, so the deduction is $35,000 on line 23200. Whether you can get this result depends on the conditions described below.

Line numbers can change with CRA form versions, so check the current T1 form and guide when you file.

How to claim the reduction

The way 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. A claim made in the year of death needs a letter attached to the return, while later claims need a letter sent to the CRA.

• Final payout in the year of death: claim on the final return and attach a letter.
• Final payout in a later year: send a letter to the CRA and request the carry-back through Form RC249 and a reassessment.

When the relief is not available

The deduction is generally unavailable if the plan held a non-qualified investment after death, or if the final distribution is made after the end of the year following the year of death. The CRA may waive the timing rule case by case. The rules are in s. 146(8.92) to (8.93) of the Income Tax Act.

There is also no decrease-in-value deduction when the amount was never included in the deceased's income, for example where the full amount was rolled over to a spouse. In that case the spouse reports the amount received instead.

Increases work the other way. A gain in value after death is included in the income of the beneficiary or estate that receives it, for the year it is received.

Practical steps for the executor

• Get the plan's fair market value at the date of death in writing from the financial institution.
• Keep statements showing the value over time and the date and amount of the final payout.
• Ask the institution whether any investment in the plan could be a non-qualified investment, since that can block the relief.
• Aim to complete the final distribution by the end of the year following the year of death.
• Note whether the final payout falls in the year of death, which decides how you claim.
• Speak with a lawyer or accountant before filing, because the claim involves a reassessment of the final return.

Frequently asked questions