Estate Planning

The tax treatment of RRSPs on an annuitant's death is something that often confuses (and perplexes) beneficiaries of an estate.  I've seen more than one situation where the residual beneficiaries of an estate are distressed to find out that the estate is picking up the tax bill for an RRSP being transferred to a named beneficiary…the argument being that they, as residual beneficiaries, should not have to pay taxes associated with funds be transferred to someone else. 

The general rule is that absent a tax-deferred rollover (more on that in a minute), the fair market value of the RRSP on the annuitant's death is treated as income and must be included in the annuitant's terminal return (tax return that is filed for the year of death). 

As noted above, there are a couple of situations where the taxes associated with an RRSP can be avoided by the estate.  The first is where the designated beneficiary is the annuitant's spouse or common law partner; the other is where the beneficiary is the annuitant's financially dependent child or grandchild.    

Where the beneficiary is a spouse and a physically/mentally infirm child or grandchild, the RRSP can be rolled-over to the beneficiary.  Where the beneficiary is a minor child or grandchild (who isn't infirm) the proceeds of the RRSP can be used to purchase an annuity that will make payments annually until the minor has reached 18 (with such payments being taxed).  However, if the children/grandchildren are over 18 and not infirm no tax deferral will be available. 

It is worth noting that the tax liability the estate might incur is related only to the value of the RRSP on the annuitant's death.  Once the recipient starts withdrawing funds, s/he will be liable for the tax, not the estate.

If you want to know more about the tax treatment of RRSPs on death, check out the Canada Revenue Agency's memorandum on the issue. 

Have a great day!