RRSPs and TFSAs: unused contribution room at death

A key benefit of RRSPs is the ability to carry forward unused deduction room (often referred to as “contribution room”) for use in any future year.

Many Canadians, whether deliberately or not, benefit from this feature — some because they don’t have the cash to contribute for the year when room becomes available, and others because they defer contributions to a future year when they’re in a higher tax bracket.

Regardless of the reason, unused deduction room can be carried forward indefinitely, and would be available for future use.

Where maximum contributions haven’t been made, taxpayers can make use of the unused room, provided the annuitant’s age (or that of a spouse) allows for RRSP (or spousal RRSP) contributions. (RRSP contributions can’t be made after the year an annuitant reaches 71, unless they have a younger spouse and contributions are made to a spousal RRSP.)

Using RRSP deduction room at death

It’s not unusual for a taxpayer to die with unused RRSP deduction room. If contributions were made prior to death but not yet deducted, the contributions can be deducted for the year of death, subject to available room.

If, at the time of death, unused room is available but contributions haven’t been made, there is an opportunity to make use of the unused room. Consider the following example.

Roger died in September 2017. At time of death, he had unused RRSP deduction room of $40K and no contributions to deduct (i.e., all prior-year contributions had already been deducted). Prior to death, Roger earned $80K in employment income, which is taxable on his terminal tax return. In settling Roger’s estate, his executor wonders if there’s a way to make use of Roger’s $40K of unused room to reduce his taxable income for the year of death.

Tax legislation doesn’t allow contributions to an RRSP of a deceased annuitant. This is confirmed in CRA guide T4040, RRSPs and other registered plans for retirement (see page 13 of the guide: “Contributions made after death,” under “Contributing to your spouse’s or common-law partner’s RRSP, SPP or both”). In other words, unused RRSP deduction room at death is normally lost.

However, the guide confirms that, where the deceased has a surviving spouse or common-law partner who is age 71 or younger, contributions can be made to a spousal RRSP. Subject to the deceased’s unused RRSP deduction room, contributions by the deceased’s estate to a spousal RRSP would be deductible on the deceased’s terminal tax return, offsetting taxable income for the year of death. The spousal RRSP contribution must be made in the year of death or within 60 days after the year of death.

Applying these rules to Roger’s situation, in the absence of a surviving spouse or common-law partner, Roger’s unused RRSP room would be lost. However, if Roger had a spouse or common-law partner at the time of death who was age 71 or younger and a beneficiary of his estate, subject to his spouse’s entitlement from the estate, his executor could make a contribution of up to $40K to a spousal RRSP, which would offset Roger’s taxable income for the year of death.

How TFSA contribution room differs

You might wonder whether a similar post-mortem planning opportunity is available for the TFSA. As with RRSPs, unused TFSA contribution room can be carried forward indefinitely for use in a future year.

Beth died in October 2017. At time of death, Beth had unused TFSA contribution room of $40K. In settling her estate, her executor wondered if Beth’s unused TFSA room could be used to help her surviving spouse, Bill, who was successor holder of Beth’s plan and beneficiary of her estate. If possible, using Beth’s unused TFSA contribution room — perhaps by way of a contribution to her TFSA — would allow Bill to receive Beth’s enhanced TFSA without impact to his own TFSA contribution room. Thus, he would fully benefit from both Beth’s TFSA and his own.

Under the Income Tax Act, only the holder of a TFSA (i.e., the person who establishes the account) can contribute to the account. Once the holder dies, only a spouse or common-law partner can become holder of the same plan if named successor holder. No provision allows for the deceased’s estate to contribute to the account, and there are no spousal TFSAs. So, Beth’s unused TFSA contribution room at time of death would be lost. If, as successor holder, Bill makes a contribution to Beth’s TFSA, the contribution impacts his own contribution room and wouldn’t make use of Beth’s unused room.

RRSPs and TFSAs are key vehicles when it comes to tax-efficient investing. Unfortunately, sometimes contribution room for these plans goes unused at death. Where appropriate, understanding the opportunity to make use of unused RRSP room at death can minimize taxes. The same opportunity, however, isn’t currently available for TFSAs.

Also read:

Navigate TFSA attribution rules

How to fix TFSA overcontributions

Navigate RRSP attribution rules

RRSP overcontribution woes

Watch for this TFSA trading pitfall

Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning, at CI Investments. Wilmot can be contacted at wgeorge@ci.com.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. Wilmot can be contacted at wgeorge@ci.com.