RRSPs at death: Do tax-deferred rollovers make sense?

Tax minimization is an important part of building wealth, including at the time of your client’s death. Different circumstances require different strategies to help minimize tax and maximize wealth for families.

When an RRSP (or RRIF) annuitant dies, the Income Tax Act (ITA) normally requires the deceased to include full plan value in income for the year of death.

Exceptions apply if a spouse, common-law partner or financially dependent disabled child or grandchild—a qualified beneficiary—inherits the assets. In such cases, a tax-deferred transfer (commonly known as a rollover) is available if the proceeds are contributed to an RRSP, RRIF, pooled registered pension plan (PRPP), specified pension plan (SPP) or qualifying annuity for the qualified beneficiary.

Read: Essential tax numbers: Updated for 2018

On death of an RRSP annuitant, families often take advantage of the tax-deferred transfer. Doing so saves tax at death and defers the eventual tax liability to when the qualified beneficiary receives an amount from their registered plan or dies.

There are, however, some situations where a tax-deferred transfer might not be the best option. Consider the following common (and fictitious) scenario.

Don, a B.C. resident, dies on Jan. 15, 2018. He is survived by his spouse, Kimberly, and two children, Donovan and Sue. At time of death, Don has an RRSP valued at $200,000, and Kimberly is named beneficiary as per the plan contract.* Prior to death, Don earns $3,000 of employment income for the year.

As beneficiary of the RRSP, Kimberly approaches the plan administrator and requests a full transfer of proceeds to her RRSP. The financial institution follows her instructions and, because Kimberly is a qualified beneficiary, a tax-deferred transfer occurs.

*In Quebec, plan contract RRSP and RRIF beneficiary designations are not allowed, and are normally made in a will.

Tax rules in this area permit families to structure their affairs so the family can pay the least amount of tax the law allows. In some cases, depending on income earned up to the date of death, it might make sense to forgo the rollover (either fully or partially) to allow for taxation to the deceased.

Consider 2018 marginal tax rates for B.C. taxpayers, as shown in the table below.

Before death, Don earned $3,000 of employment income, with no other income for the year. If his RRSP is transferred to Kimberly’s RRSP on a tax-deferred basis, his taxable income for the year would be $3,000, and he would largely forgo an opportunity to make use of lower tax brackets and rates. Further, the transferred funds may eventually be subject to tax at potentially higher tax rates when added to other income Kimberly might have in a future year.

Read: Deceased mom’s estate causes tax nightmare

Instead, all or part of the proceeds can be taxed to Don for the year of death, where lower tax rates potentially apply.

Administratively, how is this achieved? In CRA guide RC4177 “Death of an RRSP Annuitant,” CRA states that when an RRSP annuitant dies, a T4RSP slip is issued to only the spouse or common-law partner of the deceased provided the following two conditions are met:

• the spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP; and
• by Dec. 31 of the year following the RRSP annuitant’s death, all RRSP property is transferred directly to an eligible plan (e.g., RRSP, RRIF, PRPP, SPP or qualifying annuity) for the spouse or common-law partner.

Where these conditions are met, the T4RSP slip, which reports RRSP income at death ($200,000 in this case), would be issued to the surviving spouse (not the deceased), who would offset the income inclusion with a tax deduction for transfers to an eligible plan, per the ITA.

If, however, the above conditions aren’t met (for example, if Kimberly requests a cash payment instead of a full transfer to an eligible plan), the T4RSP slip would be issued to the deceased, which allows for the date of death amount to be taxed in the deceased’s hands.

Note, though, that with this option the entire amount at death ($200,000) needn’t be taxed to the deceased. Don’s executor can decide how much income to tax in Don’s hands and, using Chart 2 of CRA guide RC4177, any excess amount can be transferred to Kimberly. If the excess amount is contributed to Kimberly’s RRSP, RRIF, PRPP, SPP or annuity, it can be sheltered from tax with an offsetting tax deduction.

The above example assumes Kimberly was named beneficiary on the RRSP plan application.

Subject to different paperwork requirements, the option to tax the date of death amount in Don’s hands would also be available if Kimberly were to receive the proceeds via Don’s estate. Also, while the above example discusses RRSPs, similar rules apply for RRIFs. See CRA guide RC4178 “Death of a RRIF Annuitant or a PRPP Member” for details.

Also read: What’s the most tax-efficient retirement income source?

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.