Taxation of Registered Retirement Savings Plans at Death

A registered retirement savings plan (“RRSP”) is a retirement plan that allows taxpayers in Canada to defer tax on savings until retirement. Contributions to RRSPs are tax deductible. Tax on interest, dividends and capital gains on investments in an RRSP is deferred. When the taxpayer takes funds out of the RRSP, he or she then pays taxes on the amount withdrawn each year. You can contribute to your own RRSP or to your spouse’s plan or common law partner’s plan.

What are the tax consequences when the person entitled to an RRSP (the “annuitant”) dies?

The basic rule—to which there are some important exceptions—is that the annuitant is deemed to have received the value of the RRSP at death, and the value is then included in the annuitant’s income in his or her terminal return for the year of death. This can result in very large income taxes in the year of death.

There are some exceptions.

If the annuitant designated a spouse or common law partner (for a definition click here) as the beneficiary of the RRSP, then in the case of a matured RRSP, the spouse or common law partner becomes the successor annuitant and pays the tax as he or she receives payments from the plan. A matured plan is a plan that is paying retirement income. In this case, the estate does not have to pay the tax.

If the plan is unmatured (not yet paying retirement income), and the annuitant designates a spouse or common law partner as the beneficiary, then the spouse or common law partner may elect to transfer the RRSP into his or her own RRSP, Registered Retirement Savings Plan, or qualified annuity, and pay tax when he or she receives payments. Again, the effect is that the estate does not have to pay taxes on the RRSP for the deceased’s year of death.

What if the annuitant designates his or her estate, as the beneficiary of an RRSP, but the annuitant’s spouse or common law partner is a beneficiary of the estate? In that case, the annuitant’s executor or administrator may be able to jointly elect with the spouse or common law partner to have the same rules apply as if the annuitant had named the spouse or common law partner as a beneficiary of the RRSP.

The Income Tax Act, Canada, has similar rules that allow tax to be deferred on an RRSP for beneficiaries who are the annuitant’s financially dependant children or grandchildren. In the case of a child or grandchild who is under 18, an annuity to age 18 may be purchased with the proceeds of the RRSP. Tax is then deferred until the years in which the child receives annuity payments.

In the case of a child or grandchild who is dependant by reason of a physical or mental infirmity (whether over or under 18), the proceeds of an RRSP may be transferred into the child or grandchild’s RRSP, Registered Retirement Income Fund, or annuity.

It is important to keep in mind that if you designate someone other than a spouse, common law partner, or financially dependant child or grandchild as a beneficiary of an RRSP, the tax burden of the RRSP will fall on your estate, rather than on the beneficiary. This may not be important if your RRSP beneficiary is the same person as the beneficiary in your will. But if you are naming others as the beneficiaries in your will, you may be leaving them less than you think, unless you take into account the fact that their share will be reduced to the extent that your estate bears the tax burden in respect of your RRSP.

I have one more exception to point out in this post—which I admit already has too many exceptions. Although the tax burden in respect of an RRSP may fall on the estate, if there are insufficient funds in an estate to pay the taxes, Canada Revenue Agency may collect the tax from the beneficiary of the RRSP.

For more information, see Canada Revenue Agency’s "Death of an RRSP Annuitant" here, and Interpretation Bulletin IT-500R "Registered Retirement Savings Plans -- Death of an Annuitant" here.