Advanced tax and estate planning: taxation at death of an RRSP annuitant

By Canada Life | Jan. 25, 2023
John Yanchus, CPA, CA, TEP, Director, Tax and Estate Planning

It’s important to help your clients understand how different tax implications can affect their estate planning. In the event of their death, their registered retirement savings plan (RRSP) may be impacted differently depending on the decisions they’ve made.

How is an RRSP taxed at death?

Unmatured RRSP

An unmatured RRSP is one that has not yet started to pay retirement income.

Upon the death of the annuitant (person who is entitled to the retirement income), the general rule is the annuitant is deemed to receive an amount equal to the fair market value (FMV) of all the property held within the RRSP immediately before death. All amounts received from the RRSP during the year are reported on the annuitant’s final income tax return.

Exception

There’s an exception to this general rule. It results in no amount being included in the income of the deceased. If all the following conditions are met, the spouse or common-law partner¹ will receive the FMV inclusion in their income. They will also receive a receipt for the amount that was transferred. They can use this receipt to offset the inclusion of income. This results in a tax deferral for the spouse until funds are withdrawn from their registered plan.

Conditions

The spouse is the sole beneficiary of the RRSP, either by designation in the plan or in the will of the annuitant.
All RRSP property is directly transferred either to a registered plan² under which the spouse is the annuitant or member, or to a life insurance company to purchase an eligible annuity for the spouse, by Dec. 31 of the year following the year of the annuitant's death.

Optional reporting for a unmatured RRSP

If the exception doesn’t apply, there’s another option for reporting on the client’s personal tax return. It allows the deceased annuitant’s legal representative to redistribute income between the estate and a qualifying survivor if the amount qualifies as a refund of premiums. This deduction is discretionary and allows the legal representative to report the income on either individual’s personal tax return. This opportunity creates planning options for the legal representative.

When there isn’t a named beneficiary

If there’s no beneficiary named, the RRSP property will be included in the deceased annuitant’s estate and be governed by their will. If the refund of premiums is being allocated to the beneficiary through the will, a joint election must be filed by the legal representative and the beneficiary to have the amount taxed in the hands of the beneficiary.

Qualifying survivor

The deceased annuitant’s spouse
Financially dependent child or grandchild

A child or grandchild would be considered financially dependent if they normally live with and were dependent on the individual before their death. They must also meet one of the following conditions:

The child or grandchild's net income for the previous year was less than the basic personal amount (under 18-years-old).
The child or grandchild is physically or mentally impaired and their net income for the previous year was equal to or less than the basic personal amount plus the disability amount (any age).

A child or grandchild ordinarily living with and dependent on the annuitant before their death, but who was away from home to attend school, would still be considered as living with the annuitant.

Refund of premiums

Any amount paid from the RRSP to a qualifying survivor.
If paid to the annuitant’s estate, the amount will qualify as a refund of premiums if both the following conditions are met:
- There’s a qualifying survivor who is a beneficiary of the annuitant’s estate.
- The annuitant’s legal representative and the qualifying survivor jointly file Form T2019, Death of an RRSP Annuitant – Refund of Premiums.

When a qualifying survivor receives a refund of premiums, the amount is taxable in the year received. This amount can be deferred if it's transferred into a registered account or to a life insurance company to purchase an eligible annuity.

The only option for a financially dependent child or grandchild (without a physical or mental impairment) ro receive a refund of premiums is through an annuity for a period of not more than 18 years, less the child’s age at the time the annuity is purchased. For example, if the child is 12 years old, the period can’t be more than six years (18-12). The payments from this annuity must start no later than one year after the purchase. The transfer or purchase must be completed in the year the refund of premiums is received or within 60 days after the end of the year. The income is taxed to the child or grandchild as the annuity payments are received.

Beneficiaries

The named beneficiary of the RRSP will receive the amount paid out of the RRSP, tax free, if the amount is included in the deceased annuitant’s income. If income earned in the RRSP after the date of death is included in the amount paid from the RRSP, then the beneficiaries must include this amount in their income in the year received.

The accountability of the taxes resulting from the RRSP is typically that of the deceased’s estate. However, the beneficiary is jointly and severally liable with the deceased annuitant for the taxes owing relating to the RRSP. This situation may arise when the estate is insolvent or may not have enough assets to cover the tax liability arising from the RRSP.

Matured RRSP

A matured RRSP is one that is currently paying a retirement income.

On the death of the annuitant, the general rule is they are deemed to receive an amount equal to the FMV of all remaining annuity payments under the RRSP immediately before death. All amounts received from the RRSP during the year are reported on the annuitant’s final income tax return.

Exception

An exception to the general rule exists where the spouse is named as the sole beneficiary of the RRSP. The spouse becomes the successor annuitant of the plan and is entitled to all annuity payments made after the date of death. The successor annuitant will be taxed on the annuity payments received and therefore the deceased annuitant doesn’t include any amounts received from the RRSP at death.

If the spouse is named as a proportional beneficiary, they’ll become the successor annuitant for the portion of the assets they receive. The remaining proportion, left to another beneficiary, will be deemed received by the deceased annuitant and included in their income for the year of death.

If there’s no beneficiary named, the RRSP property will be included in the deceased annuitant’s estate and be governed by their will. If the will names the spouse as a beneficiary of the RRSP, then the spouse and the legal representative can jointly elect to make the spouse the successor annuitant of the RRSP as previously described.

Optional reporting for a matured RRSP

As described under an unmatured RRSP, the annuitant’s legal representative can redistribute income between the estate and a qualifying survivor if the amount qualifies as a refund of premiums.

Beneficiaries

The named beneficiary of the RRSP will receive the amount paid out of the RRSP, tax free, if the amount is included in the deceased annuitant’s income. If income earned in the RRSP, after the date of death, is included in the amount paid from the RRSP, then the beneficiaries must include this amount in their income in the year received.

Planning opportunities

Beneficiary designations

It’s important to help your clients have a plan before they die. Using beneficiary designations can prevent the assets from being included in the estate and being governed by the will. Estate planning and probate planning can be accomplished together using beneficiary designations from registered accounts and insurance products. Generally, naming a beneficiary (other than the estate) ensures that, except in limited cases, that the death benefit passes outside of the estate and it's not subject to probate. Be aware that beneficiary designations are only one planning component of overall estate and probate planning.

There may also be situations where benefits are lost if a designation is not made or if the timing of certain options isn’t considered as there are time restrictions in place for various transfers and benefits.

Clients should review their existing RRSP beneficiary designations should be reviewed after life events or other changes to ensure the designations are up-to-date and in accordance with their desired estate planning objectives.

Additional RRSP contributions

Under no circumstances can a deceased annuitant’s legal representative make a final contribution to the deceased’s RRSP after death. If contribution room is available to the deceased's RRSP, a contribution to the surviving spouse’s RRSP can be made if the spouse is 71 years old or younger. This contribution must be made in the year of death or in the first 60 days after the end of that year.

Optional reporting opportunities

The annuitant’s legal representative can redistribute income between the estate and a qualifying survivor if the amount qualifies as a refund of premiums:

There may be opportunities to report this income in the personal tax return of the deceased if there are unused losses or low taxable income for the year (for example, if the death occurred early in the taxation year).
There may also be opportunities to remove the income from the estate of the deceased and report it by the beneficiary if they have a lower marginal tax rate.

Summary

Upon death, taxation can’t be avoided, but there may be opportunities to defer it into the future. Planning options may be available to the beneficiaries and the legal representatives of a deceased’s registered account. The options may include reviewing the marginal tax rate (the rate of additional federal income tax to be paid on additional income) applicable and who pays the tax.

Do your clients have a RRIF or a TFSA? Refer to these articles on how to incorporate similar planning for other registered plans:

Throughout this article, the word spouse, will include a common-law partner as defined by subsection 248(1) of the Income Tax Act (Canada) for income tax purposes.

Registered plans include registered retirement savings plan (RRSP), pooled registered pension plan (PRPP), specified pension plan (SPP) or a registered retirement income fund (RRIF).

This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of January 2023.

Canada Life and design, and Canada Life Investment Management and design are trademarks of The Canada Life Assurance Company.