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It is said that there are two certainties in life – death and taxes. Unfortunately, many are not aware how the two can come together at the same time to create unintended distributions (and a legacy of conflict) in the absence of a well-structured estate plan. Financial advisors can help clients as they navigate their way through situations like the following.

Alex, age 68, was recently diagnosed with a rare heart disease which doctors predicted would shorten his life. Upon hearing the news, Alex decided it was time to review his estate plan with a view towards transitioning his assets to his kids, Carl (42) and Pete (38). Since becoming a widower several years ago, Alex has lived a modest life, accumulating the bulk of his assets in an RRSP worth approximately $410,000. Alex’s only other asset was a non-registered mutual fund account totaling $105,000.

Carl runs a successful computer programming business. Pete works for a landscaping company. Over the years, Pete has had some challenges financially, but has been able to support his family.

Read: Bad estate planning burns inheritance

Throughout the years, Pete has spent a considerable amount of time with his father helping with day-to-day needs. While Carl would have loved to do the same, proximity did not allow it – Carl lived in Guelph, while Alex and Pete lived in Toronto.

In reviewing his estate plan, recognizing Pete’s financial challenges, Alex decided that he wanted to leave his $410,000 RRSP to Pete and took the necessary steps to ensure that Pete was named sole beneficiary on his RRSP contract.


(Note: In Quebec, it is generally not possible to name beneficiaries on RRSP or RRIF applications. RRSP and RRIF assets generally flow through the estate of the deceased and are governed by the terms of the deceased’s will.)

Wanting to leave assets for Carl as well, Alex named Carl executor and sole beneficiary of his estate with the intention of leaving his non-registered investment account to Carl at death.

Shortly after revising his estate plan, Alex died. Did Alex achieve his objective of leaving the bulk of his assets to Pete while, at the same time, ensuring the availability of an inheritance for Carl?

Let’s review the tax implications that resulted from Alex’s death. When an RRSP annuitant dies, unless the RRSP beneficiary is a “qualified beneficiary” (ie. spouse, common-law partner or financially dependent child or grandchild), the RRSP annuitant is deemed to have sold his/her RRSP just before death, resulting in a taxable income inclusion for the deceased for the year of death.

Read: Estate planning for blended families

The income inclusion generally equals the fair market value (FMV) of the RRSP at the time of death. Similar rules apply for RRIFs. Tax resulting from this event would be a liability of the deceased’s estate to be funded by assets of the estate. This can present challenges for beneficiaries of the deceased’s estate as their inheritances would be reduced to account for this debt even though the full value of the RRSP would be paid directly to beneficiaries named on the RRSP contract.

In Alex’s case, since his RRSP had a value of $410,000 at the time of his death, there was an income inclusion of $410,000 on Alex’s final tax return. Because his RRSP beneficiary (Pete) was not a qualified beneficiary, there was no opportunity for a tax-deferred rollover. As the majority of Alex’s income inclusion was subject to tax at 46%, a tax liability of approximately $188,000 in respect of the RRSP resulted. Alex’s estate was responsible for funding this liability to the fullest extent possible – even though it meant the elimination of Carl’s inheritance. Because the value of Alex’s estate at the time of death was $105,000, and because all debts (including income tax) must be paid before any excess is paid to beneficiaries of a deceased’s estate, the full value of Alex’s estate ($105,000) was used to fund the tax liability of his RRSP and other income in the year of death, reducing Carl’s inheritance to zero.

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