RRSP Value Drops After Death: Who Bears the Tax in Canada?

Markets keep moving after someone dies. If the RRSP was worth one amount on the date of death and is worth less by the time the money is paid out, it feels unfair that the tax seems to follow the higher figure.

This article explains how the tax is measured, what relief exists when the value falls, and when that relief does not apply. Your facts will shape the result, so treat this as a guide for a conversation with a lawyer or accountant.

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

Tax is measured at the date of 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. That amount is reported on the deceased's final return.

The deemed amount is added to the deceased's other income for the year of death and taxed at graduated rates. This is so even when a named beneficiary is the one who actually receives the money, unless that beneficiary is a qualifying survivor who receives a refund of premiums.

In plain words, the final return is taxed on the value at death. A later fall in value does not change that automatically.

Relief when the value falls before payout

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.

In the CRA's example, the fair market value at death was $185,000 and $150,000 was received, which produced a $35,000 deduction on line 23200.

How you claim depends on timing. If the final distribution is 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, and later claims need a letter to the CRA.

When the relief is not available

The decrease-in-value 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 case by case.

There is also no deduction when the amount was never included in the deceased's income, for example where the full amount was rolled over to the spouse.

• Non-qualified investment held after death: generally no relief.
• Final payout after the end of the year following death: generally no relief, though the CRA may waive this.
• Full amount rolled to a spouse and never taxed to the deceased: no deduction.

What happens if the value rises

The reverse also applies. 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.

Beneficiaries should also know that tax on the final return can reach them. A person who receives an RRSP amount and was not the annuitant is jointly and severally liable with the last annuitant for the part of the tax attributable to that amount, so beneficiaries can be pursued if the estate cannot pay.

What to do next

• Get the plan's value at the date of death in writing from the carrier.
• Record every payment from the plan and its date, and keep the T4RSP slips.
• Check whether the plan holds anything that may be a non-qualified investment.
• Aim to complete the final distribution within the timing the rules allow.
• Speak with a lawyer or accountant before filing the final return, so the decrease claim is made correctly.

Frequently asked questions