Registered Retirement Savings Plans (RRSPs) continue to be a significant part of Canadians’ assets. Upon owner’s death, the RRSPs are treated as income, determined at the fair market value and taxable at the deceased marginal tax rate. However, there are certain categories of beneficiaries who get the proceeds tax-free.
A spouse or common-law partner, who is a beneficiary, can roll over the RRSP assets into their own RRSP without paying taxes. The funds will grow tax-free until they are withdrawn from the account.
It is also possible to designate a financially dependent child or grandchild as the beneficiary. In such a case, the RRSP will be transferred directly into a term certain to age 18 annuity in the child’s name.
The RRSP proceeds of a deceased individual can also be rolled over to the Registered Disability Savings Plan of the deceased individual’s child or grandchild, whose dependency stems from physical or mental impairment.
Naming a charity as a beneficiary is another option. Although the value of the RRSP will be included in the final tax return, the income tax will be practically eliminated by a tax credit; thus, a charitable designation of the retirement funds is tax-neutral.
Registered Retirement Income Funds (RRIFs) are similar to RRSPs. Looking from another perspective, both are two parts of the process of, first, saving and growing the assets in the plan, and then using them as the income fund when the owner no longer works.
An important feature in both RRSPs and RRIFs is the fact that they can grow tax-free and only the withdrawn amounts are taxable. It is worth remembering that RRSPs have to be converted to RRIFs by the end of the year the owner turns 71.
The tax-conscious options when it comes to naming the beneficiaries of the RRIFs are the same as with the RRSPs. The almost purely nomenclatural difference between the rollover of the RRSPs and the naming of the successor annuitant, known also as successor holder of the RRIFs, is important because when the spouse or common-law partner is designated as such, then the account will stay open with a spouse as the new owner and there will be no need to collapse the deceased person’s RRIF, to sell the assets and roll over the proceeds to the beneficiary’s account and that means saved time on paperwork and formalities.
Make sure that the assets will be transferred directly to the beneficiaries and not through the estate; otherwise, the value of the RRSPs or RRIFs will have to be added to the value of the estate, increasing the estate administration tax (formerly probate), and to the final tax return, generating another tax liability.
If it is possible, avoid naming non-dependent adult children as beneficiaries. If you have no spouse or common-law partner and no dependent children or grandchildren, consider benefiting a charity. Taking into account the fact such a donation is tax neutral, the benefit to a charitable cause will be much larger than the net amount available to an adult non-dependent beneficiary after the payment of the income tax, whether by them or by the estate.
(Okonski is manager of Planned Giving and Personal Gifts at the Archdiocese of Toronto.)