January 4, 2022

Death, Beneficiaries, and Taxes –What Happens Now?

It's often said that death and taxes are inevitable. Yet even after death, the tax man (or tax woman), can still come knocking at the door, leaving less of your legacy for loved ones and charities.

Depending on how your registered accounts are set up, they may be treated differently when you die.

Registered Retirement Savings Plan (RRSP):

Contributions made to your RRSP during your working years are deductible and are sheltered from taxes until you start withdrawing from the plan.

In general, at the time of death, the RRSP annuitant (owner) is deemed to have cashed out their RRSP assets and the fair market value of the investments is included in their income for the year and taxed at their marginal tax rate. For example, if you have $100,000 in your RRSP, and your regular income for the year of death is $50,000, your estate will pay tax on $150,000 at the applicable tax rate.

However, the RRSP assets can be transferred or ‘rolled-over’ to a spouse who has been designated as a beneficiary in the RRSP. Depending on their age, a spouse can decide to transfer the assets to their RRSP or RRIF in order to keep the tax-deferred status. With this approach, they will not be paying any taxes on the assets until they start withdrawing funds from their RRSP/RRIF. The estate of the deceased will also not be required to pay taxes on the transferred RRSP assets.

Although a common choice, you may not designate a spouse as the beneficiary of your RRSP. Alternate beneficiary designations are explained below:

1.      Financially dependent child or grandchild who is infirm* (has a physical or mental disability)

Depending on the child’s age, they may do the following with funds from the account:

·       Transfer it into their own RRSP or RRIF

·       Purchase an annuity that pays them annually until they reach 18 years of age

·       Roll-over the assets into a Registered Disability Savings Plan (RDSP). There’s a lifetime overall limit of $200,000 to funds that can be transferred to an RDSP(including contributions). RRSP assets rolled-over into an RDSP are not eligible for disability grants.

2.      Financially dependent child or grandchild**

Depending on the child’s age, they may do the following with funds from the account:

·       Purchase a fixed-term annuity that pays them periodically until they reach 18 years of age. Any taxes due on the annuity payments will be paid by the child who would normally be in a much lower tax bracket.

·       If the child is an adult but financially dependent (and with no disability), the funds can be transferred to them in cash as well. The funds are then taxed as ordinary income at their marginal tax rate.

3.      Financially independent child or grandchild

·       The fair market value of assets in the RRSP is transferred to the beneficiary and the value is fully reported in the final income tax return of the deceased, where it is subject to taxation.

4.      A charitable organization

·       An RRSP annuitant can choose to designate a charitable organization as a part or full beneficiary to their RRSP assets after death. When this happens, the value of the assets is still included in the final income of the deceased, and taxes are assessed.

5.      Designating the estate as the beneficiary

·       If no beneficiary is named or if the estate is designated as a beneficiary in the will, RRSP assets are added to the estate and included in the income of the deceased. The estate pays the required taxes.

·       Having RRSP assets tied up with the rest of the estate increases the value of the estate and can result in increased probate and other administration fees.


Registered Retirement Income Funds (RRIFs):

Funds in a deceased’s RRIF are generally treated in a similar way to RRSPs. A difference between RRIFs and RRSPs is that for an RRIF, a spouse or common-law partner can be named as a “successor-annuitant” in the RRIF application. When this is the case, following the death of the RRIF holder, the account stays open and the spouse becomes the new owner and will continue to receive the RRIF payments. The advantage of designating a spouse as a successor annuitant is that there will be no need for them to collapse your RRIF and it is less stressful.

Tax-Free Savings Account (TFSA):

The TFSA is different from an RRSP or RRIF in that the initial holder of the account made contributions to the plan using after-tax funds. And, by definition, the account is tax-free, and income earned on investments is generally non-taxable. A TFSA holder has an option to indicate beneficiaries on their initial application. Options available include naming a:

1.      Successor Holder

·       This designation can only be used for a spouse or common-law partner. Similar to “successor annuitant” for RRIF beneficiaries, a successor holder to a tax-free savings account simply takes over the account and becomes the new owner.

·       They do not need to have a TFSA contribution room available, and the account will not be subject to any taxes, including on any income earned after the death of the original holder.

2.      Beneficiary

·       A TFSA holder can designate a spouse, child, or any other individual as a beneficiary to their account after they die. In general, the account has to be collapsed and the value at the time of death will go to the named beneficiary and remain tax-free.

·       Any individual other than the spouse or common law partner, who inherits TFSA proceeds can contribute the amount to their own tax-free savings account if they have a contribution room available. Any capital gains or income earned on the TFSA between death and when it is paid out, are taxable as ordinary income in the hands of the beneficiaries.

3.      Estate

·       If no beneficiary is named or you name your estate as the beneficiary, the proceeds from your TFSA will be added to your estate and this will likely increase probate fees.

Please Note - in accordance with The Family Law Act, you cannot eliminate your spouse entirely from your estate planning.

Closing Thoughts

Retirement and estate planning can be difficult to navigate without extensive research or some professional help. We would be happy to help you develop a comprehensive estate plan with your legal and accounting professionals, that meets your needs and minimizes your overall tax burden. Reach out anytime, we’d love to chat.

Download our Estate Planning Checklist to get started.

Jessica Mann, B.A.

Associate Investment Advisor

Adamson Wealth Group | iA Private Wealth

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

*An infirm child is deemed to be financially dependent on the deceased if they had a personal income in the previous year that is less than the basic personal amount ($13,808) plus the disability amount ($8,662) for that year – a total of$22,470 for 2021 ($21,805 for 2020).

**A child is deemed to be financially dependent on the deceased if they had a personal income in the previous year that is less than the federal basic personal amount for that year – $13,808 for 2021.

Sources: Dynamic Digital Estate Planning Checklist – Dynamic Snapshots™ “When Life Changes” by Dr. Bill Webster & Gordon MacGregor; The Centre for the Grief Journey, Inc., 2011.“Don’t let the tax man be your beneficiary when you die” by Joel Schlesinger; The Globe and Mail, 2015