Taxes When a Non-Spouse Inherits an RRSP in Ontario

If your parent named you on their RRSP, you may be wondering whether the money arrives tax-free, and whether the tax bill is yours or the estate's. It is a fair question, and the answer depends on facts that should be confirmed with an accountant.

This article covers how the designation works in Ontario, why a non-spouse is in a different position from a surviving spouse, and the steps that help you and the estate trustee avoid surprises.

How you come to be the RRSP beneficiary

A participant in a plan such as an RRSP, RRIF or pension may name a person to receive the benefit payable on their death, by signed instrument or by will. A designation in a will takes effect only if it relates expressly to a plan.

If there is more than one designation, a later one revokes an earlier one to the extent they are inconsistent. The plan administrator is discharged by paying the person named in the latest designation made under the plan's terms.

Why a child is treated differently from a spouse

At death, the deceased is treated as having sold all their capital property just before death at fair market value, with any gain or loss reported on the deceased's final return. Property passed to a surviving spouse or common-law partner who lived in Canada at the time of death may not produce a capital gain or loss.

That spousal treatment is an exception, and an adult child is not a spouse. So the tax outcome for a child can be different from what a surviving spouse would see. Exactly how the RRSP is reported, and by whom, should be confirmed with an accountant who can look at the plan and the final return.

Is an RRSP payout an inheritance you do not report?

The CRA lists most gifts and inheritances, and most life insurance payouts after someone's death, among the amounts you do not report as income. That list is general. It should not be read as confirming that an RRSP payout is tax-free to you.

If you later sell inherited property, you report the sale on your own T1 return, and the gain is measured from the fair market value reported on the deceased's final return. Keep every statement and slip you receive.

The estate trustee's role and risks

Before distributing property, an estate's legal representative should get a clearance certificate (Form TX19). Without one, they are personally liable for the deceased's unpaid tax, up to the value of the property distributed. This is why you may find the estate trustee cautious about releasing other estate money to you.

If you live outside Canada, different rules can apply. Estate or trust income paid or credited to a non-resident is subject to Part XIII tax at 25%, and a tax treaty can reduce the rate or give an exemption. Whether that applies to RRSP money depends on how it is paid, so ask an accountant.

• A dependant of the deceased may apply for support, and plan designations are added back to the net estate when the court sets that support.
• That application is generally due within six months after letters probate or letters of administration are granted.

What to do next

• Get written confirmation from the plan administrator that you are the named beneficiary.
• Ask the estate trustee whether a clearance certificate has been requested.
• Book time with an accountant before the final return is filed, and bring the plan statements.
• Keep records of any amounts you receive and when you receive them.
• See an estate lawyer if another family member disputes the designation.

Frequently asked questions