When an RRSP annuitant dies, it’s often possible to roll over the RRSP to a beneficiary on a tax-deferred basis. If the beneficiary is a spouse, common-law partner (CLP) or a financially dependent child or grandchild with a mental or physical disability, the beneficiary can request that the proceeds roll over to the beneficiary’s RRSP or RRIF (among other pension, annuity or RDSP options).

A disabled child or grandchild is considered financially dependent if he ordinarily lived with the RRSP annuitant and had a prior year net income of less than the basic personal amount plus the disability amount ($19,226 for 2015).

What is a rollover? Who qualifies for it and how is it carried out?

Under the federal Income Tax Act, a tax-deferred rollover occurs in two parts. When an RRSP annuitant dies, she’s deemed to have received her RRSP assets just before death. This generally means the RRSP value at the time of death is included in the taxable income of the deceased for the year of death.

However, if the beneficiary is a “qualified beneficiary” (a spouse, CLP or financially dependent child or grandchild), on receipt of the proceeds, the income inclusion is normally transferred from the deceased to the beneficiary and is reported on the beneficiary’s tax return for the year.

This first step of the rollover process is referred to as a “refund of premiums.”

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The second part of the rollover process is the tax-deferral part. Where a spouse, CLP or financially dependent and disabled child/grandchild contributes the amount received to an RRSP or RRIF in the year of receipt (or within the first 60 days of the following year), the spouse, CLP or child/grandchild can claim a tax deduction under section 60(l) of the ITA to offset the taxable income inclusion. RRSP contribution room is not required for this deduction. The result? A tax-deferred rollover.

For example:

Trevor recently died in Ontario. On Trevor’s RRSP contract, his spouse, Nicky, is named sole beneficiary. Because Nicky is a qualified beneficiary, she would qualify for a refund of premiums to transfer Trevor’s date-of-death income inclusion to Nicky. To eliminate tax on receipt of the proceeds, the RRSP assets are directly transferred to Nicky’s RRSP. At tax filing time, Nicky receives a T4RSP tax slip that requires her to include the date-of-death RRSP amount in her taxable income, but she offsets this amount with a 60(l) tax deduction.

The above rollover is commonly seen when a qualified beneficiary is designated as beneficiary on an RRSP application. Where this occurs, the proceeds normally bypass the deceased’s estate, reducing probate fees (where applicable) and avoiding estate creditors and complex estate settlements.

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Is a tax-deferred rollover still available if someone receives RRSP proceeds through the deceased’s will?

Section 146(8.1) of the ITA allows for a refund of premiums when RRSP proceeds are received by a beneficiary through a gift by will, provided the beneficiary is qualified and the deceased’s executor jointly elects with the beneficiary to treat the proceeds as a refund of premiums.

The executor and beneficiary must complete and sign CRA form T2019. The form should be included in the tax returns for both the deceased and beneficiary for the year payment is made to the deceased’s estate.

When this occurs, the date-of-death income inclusion is normally transferred from the deceased to the beneficiary – part 1 of the rollover process. Thereafter, if an RRSP contribution is made to the beneficiary’s RRSP or RRIF before the end of 60 days after the year the RRSP assets are paid to the deceased’s estate, the beneficiary can claim a 60(l) tax deduction, offsetting the income inclusion – part 2 of the rollover process.

For example:

Trevor recently died. On Trevor’s RRSP application, his estate was named beneficiary, but his wife, Nicky, is beneficiary of his estate. In an attempt to minimize tax payable for the year of death, Nicky and Trevor’s executor, his adult son, Phil, jointly elect to treat the RRSP payment to Trevor’s estate as a refund of premiums taxable to Nicky. CRA form T2019 is completed and included in the tax returns for both Trevor and Nicky for the year of payment to Trevor’s estate to indicate the details of the transaction. The RRSP proceeds are then paid to Nicky via Trevor’s estate, and a contribution to Nicky’s RRSP is subsequently made (before the end of 60 days following the year of payment to the estate). The end result is a tax-deferred rollover – a date-of-death income inclusion to Nicky, offset by an RRSP tax deduction.

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This provision has brought much relief to executors and beneficiaries who realize after the death of an RRSP annuitant that he failed to designate a qualified beneficiary on his RRSP application. Sometimes the omission is intentional (e.g., to allow for greater control over the distribution of the asset); sometimes it is not. In Quebec, with the exception of insurance contracts, RRSP beneficiary designations cannot be made on or pursuant to plan contracts, meaning such designations are usually made by way of will.

The 146(8.1) election provides flexibility in tax planning in that partial rollovers are allowable (which can allow for use of a deceased annuitant’s lower tax brackets or unused tax credits to minimize RRSP tax payable). A similar provision is available on death of a RRIF annuitant (CRA form T1090 is used for this purpose). But, annuitants and advisors should keep in mind that RRSPs and RRIFs paid to an estate are normally subject to probate tax, estate creditors and complex estate settlements where applicable.

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.