In a previous article, we discussed how the absence of withholding taxes on the death of an RRSP or RRIF annuitant can create unexpected consequences. In brief, withholding taxes don’t normally apply to the value of the plan at death — the taxable “date of death” amount. This can create a significant tax bill for the deceased’s estate in the absence of a tax-deferred rollover to an eligible plan1 for a spouse, common-law partner or financially dependent child or grandchild.
As per the Canada Revenue Agency (CRA), withholding taxes do not normally apply to date of death amounts because the amounts are “deemed received” by the deceased and not “paid” to them;2 the tax rules normally require amounts to be paid for withholding taxes to apply. It is important to note that this applies when the RRSP/RRIF annuitant was a resident of Canada at the time of death. The filing of a terminal tax return for the deceased’s year of death provides a path for the CRA to receive taxes owed for these amounts.
How does the situation change if the RRSP or RRIF annuitant is not a resident of Canada at the time of death and not required to file a Canadian terminal tax return? Consider the following scenario:
Until recently, Tammy lived and worked in Canada, where she accumulated assets within an RRSP. Three years ago, Tammy moved to the United States for a job and ceased to be a resident of Canada for tax purposes. She filed a final tax return as a resident of Canada for her year of departure.
Six months ago, Tammy died. Her sole Canadian asset was her RRSP, valued at $300,000 on her date of death. Tammy did not have a spouse, common-law partner or dependent children. Knowing that non-residents of Canada are not normally required to file a Canadian tax return for RRSP and RRIF income, Tammy’s executor wants to know how Canada will treat Tammy’s RRSP for tax purposes for her year of death.
Generally, with certain exceptions,3 non-residents are not required to file a Canadian tax return to report Canadian-source income or gains.4 Withholding taxes (withheld by the payer and remitted to the CRA on the non-resident’s behalf) normally represent the non-resident’s final tax obligation to Canada in respect of the income.
In the case of taxable amounts deemed received on death, if, as with Canadian residents, withholding taxes were not applied to the date of death amount for non-resident RRSP/RRIF annuitants, the Canadian government would risk losing revenue simply because there is no requirement for non-resident annuitants (or an executor on their behalf) to file a Canadian tax return to report this income.
To address this issue, the Income Tax Act5 requires withholding taxes to be applied to these amounts. Unlike with Canadian residents, date of death amounts are deemed “paid” to non-resident RRSP/RRIF annuitants at the time of death allowing for Canadian withholding taxes of up to 25%.6 Let’s apply this to our example:
Tammy’s RRSP would be deemed paid just prior to death, resulting in a taxable income of $300,000 for Canadian tax purposes for her year of death. Tammy’s executor would not be required to file a Canadian tax return to report this income, but the RRSP issuer would withhold $75,000 ($300,000 × 25%) from amounts paid to Tammy’s estate in respect of this tax liability.
How would the situation change if Tammy had a surviving spouse or common-law partner who was the beneficiary of the RRSP/RRIF? The tax rules permit Canadian residents, upon death, to transfer RRSPs and RRIFs on a tax-deferred basis to a surviving spouse, common-law partner or financially dependent child or grandchild provided the proceeds are used to fund an eligible plan for the beneficiary.
If the RRSP/RRIF annuitant is a non-resident, would a similar transfer be available? And if so, would the beneficiary need to be a Canadian resident?
Similar to Canadian residents, non-resident RRSP/RRIF annuitants can transfer these plans on death to a surviving spouse, common-law partner or dependent child or grandchild on a tax-deferred basis provided the proceeds are transferred to an eligible plan for the beneficiary. CRA form NRTA1 is normally used for this purpose and contribution room for the receiving plan is not required.7 The transfer is permitted regardless of where the beneficiary resides, but the beneficiary would need a Canadian social insurance number to have an eligible plan. Non-resident withholding taxes would not apply to the transferred amount.
The above rules discuss taxation in Canada. As tax implications can differ from country to country, in addition to Canadian taxation, non-resident annuitants, their executors and beneficiaries should discuss the foreign tax impact of their proposed transactions with a tax specialist in their country.
1 Subject to conditions, eligible plans include an RRSP, RRIF, pooled registered pension plan (PRPP), specified pension plan (SPP), registered disability savings plan (RDSP) and registered annuity.
2 While taxable to the deceased, date of death amounts are normally paid to the deceased’s estate or a beneficiary.
3 When “taxable Canadian property” (TCP) is sold, a Canadian tax return is normally required. TCP includes Canadian real property, business property used in a business in Canada and designated insurance property.
4 Non-residents can elect to file a Canadian tax return if they wish. This usually makes sense only if taxes payable via the return would be less than withholding taxes at source.
5 Sections 212(1)(l) and (q), and 214(3)(c) and (i) collaboratively.
6 The withholding tax rate would depend on any tax treaty between Canada and the deceased’s country of residence.
7 Transfers to an RDSP require RDSP contribution room.