Estate Planning

Tax Treatment of RRSPs on an Annuitant's Death

By Hull & Hull LLP

With the deadline for RRSP contributions right around the corner, I thought it would be worthwhile to review the tax treatment of RRSPs on an annuitant’s death. 

Generally speaking, when an annuitant dies, the fair market value of the RRSP is attributed to the annuitant’s income during his or her final year of life and must be included on the terminal return. The result is that an RRSP will be generally taxed in the hands of the deceased. 

However, there are exceptions to this rule.  The estate can avoid paying the taxes on an RRSP if the following are the beneficiaries:

a)      The annuitant’s spouse or common-law partner; or

b)      The annuitant’s dependant child or grandchild. 

The tax implications for the above beneficiaries vary.  If the beneficiary is the spouse, common-law partner, or a dependant child or grandchild with a physical or mental infirmity, then tax can be delayed by transferring the funds to an RRSP or RRIF. 

A dependant child or grandchild (with no infirmity) has the option of staggering the tax consequences by purchasing an annuity that matures no later than his or her 18^th birthday. 

However you choose to deal with your RRSPs when planning your estate, it is always a good idea to talk with your estate planner about the tax implications of any designations you are making. 

For more information, check out the Canada Revenue Agency’s memo on the “Death of an RRSP Annuitant”. 

Thanks for reading,

Megan F. Connolly  

Full post as published by Toronto Estate Law Blog on February 20, 2008 (boomark / email).