The owner of a registered retirement savings plan (“RRSP”) (whether before or after its maturity) is deemed to have disposed of the account upon death and the full value of the RRSP is brought into the deceased owner’s income in her terminal income tax return. 

Tax Rollovers

This tax burden can be deferred where the RRSP is designated in favour of the deceased’s surviving dependent child or grandchild who is under the age of eighteen, or longer if such child or grandchild is entitled to a disability tax credit under the Income Tax Act (Canada). Such a deferral can be achieved while also directing the trustees of the deceased’s estate to purchase an annuity on behalf of the beneficiary. Currently, the rules surrounding the distribution of an RRSP upon death to a dependent child or grandchild do not permit the use of a discretionary trust, however the government is in the process of reviewing such rules with an aim to provide for more flexibility.

This tax burden can also be deferred where the RRSP is contributed to a surviving married or common-law spouse (same-sex couples included). In such a circumstance, the RRSP is transferred to the surviving spouse who is then subject to tax on the value of proceeds received – there is no longer an income inclusion in the deceased owner’s terminal return. However, if the surviving spouse contributes the proceeds received to his own RRSP then he will only be subject to tax on the amount withdrawn in a given taxation year. The remaining amount that has not been drawn upon will continue to achieve the tax deferral (i.e. “rollover”) until such time or times as it is withdrawn.

Leaving Your RRSP to Your U.S. Spouse

Where a deceased owner designates her non-resident surviving spouse as beneficiary of the RRSP, the rollover may still be available. Such a transfer ought to qualify for the rollover, notwithstanding that the surviving spouse is a non-resident of Canada at the death of the owner, provided that (i) the transfer of the proceeds must be made by the deceased spouse’s estate on behalf of the surviving spouse pursuant to an authorization in prescribed form (Form NRTA1, Authorization for Non-Resident Tax Exemption); and (ii) the payment to the RRSP, would have been deductible under the Income Tax Act (Canada) if the surviving spouse had been resident in Canada throughout the year.

In addition to the deferral mechanisms outlined above, additional tax benefits can be achieved with respect to an RRSP where the owner has formally designated one or more beneficiaries in respect of the account by way of a beneficiary designation.

Beneficiary Designations

A valid beneficiary designation operates to facilitate the direct transfer of the RRSP to the named beneficiary. A direct transfer avoids the need for the asset to be dealt with under the estate of the deceased and transferred to the beneficiary through the executor. Accordingly, because the RRSP can be transferred outside of the estate, directly to the designated beneficiary, estate administration tax (i.e. probate) is not exigible on the value of the RRSP. In Ontario, probate tax is approximately 1.5% of the value of the asset, calculated at the death of the owner. By way of example, a beneficiary designation in respect of an RRSP worth $1,000,000 at the death of the owner can achieve probate tax savings to the deceased’s estate of approximately $15,000. That’s $15,000 more in the pockets of the beneficiaries of the deceased’s estate.

A beneficiary designation can be made directly with the issuing financial institution, under a Last Will and Testament, or by way of a stand-alone document.

Even where a rollover in respect of the RRSP is not available to the deceased (i.e. no surviving dependent child, grandchild, or spouse), probate tax savings can still be achieved by way of beneficiary designation. There are no similar limitations on whom the deceased owner must designate in order to benefit from the probate tax savings. So long as the owner has made a valid designation, probate should not apply.

The foregoing describes some planning opportunities for dealing with an RRSP upon death. There are also excellent planning opportunities to achieve significant tax savings in respect of an RRSP where a Canadian resident taxpayer, prior to death, migrates to the US and becomes a resident of the US.