It was almost 36 years ago that Luis Carlos de Noronha Cabral de Camara, of Portugal, left his estate to 70 people that he had randomly chosen out of a Lisbon phone book. Since he had no spouse or children, he chose 70 lucky people who were named in his will to receive his assets, which consisted of a 12-room apartment in central Lisbon, a house near the northern town of Guimaraes, a couple of healthy bank accounts, a luxury car and two motorbikes. Each beneficiary walked away with several thousand euros.
Wouldn’t it be fun do the same with your RRSP or RRIF? Well, hold on – if you do have a spouse or kids, you might want to consider a different idea. Today, I want to talk about options for naming beneficiaries of your RRSP or RRIF.
Tax on Death
The general rule is that, when you die, you’ll face tax on the fair market value of the assets in your RRSP or RRIF. This can result in a big tax liability. It’s not uncommon, for example, to pay tax at the highest marginal tax rate on your plan assets in your year of death, which could mean that about half of those assets may be owing to the taxman.
There are exceptions to these rules where you designate a certain person, or more than one, as the beneficiary of your RRSP or RRIF.
Naming Your Spouse
If you have a spouse or common-law partner it’s most common to name that person as the beneficiary of your RRSP or RRIF. The reason? Your spouse can wind up your plan upon your death and transfer the plan assets to his or her own RRSP or RRIF, or purchase an annuity, on a tax-deferred basis. Your spouse won’t face tax until funds are withdrawn from his or her RRSP, RRIF or when annuity payments are received.
Your spouse will have to make a transfer of your plan assets to his or her own plan by Dec. 31 of the year following the year in which you die. Any minimum RRIF payment for your year of death that wasn’t paid to you will be paid as taxable income to your spouse (so, the minimum withdrawal amount can’t be transferred tax-free to the surviving spouse’s plan).
If you have very little income in your final year, or have losses to use up, it could make sense to not transfer all of your RRSP or RRIF assets to your spouse’s plan. Rather, allowing some of your plan to be taxable in your year of death could allow for the using up of tax credits, deductions, or losses that might be available. Your executor can choose the amount to be taxed on your final return.
When it comes to an RRIF (not an RRSP), you have the option of naming your spouse as the “successor annuitant” instead. In this case, your RRIF continues to exist after your death (as opposed to being wound-up and the assets transferred to your spouse’s plan) and your spouse becomes the annuitant. Administratively, this is much easier. And if you happen to be younger than your spouse then your spouse can continue making withdrawals based on your age schedule rather than his or her own, which will allow for a longer deferral of tax.
Naming Dependents
You can also defer tax if you name a financially dependent minor child or grandchild, or one that has a mental or physical infirmity, as beneficiary of your RRSP or RRIF. Your child or grandchild must have lived with you and depended on you just prior to your death. Further, their net income for the year before your death must generally have been less than the basic personal amount ($15,000 in 2023) plus, where they have a disability, the disability amount ($9,428 in 2023). It may be possible to demonstrate financial dependence if the child’s or grandchild’s income is above these amounts, but it would have to be proven with facts and circumstances.
If a child or grandchild qualifies, your plan assets can be transferred tax-deferred to their RRSP or RRIF, or be used to purchase an annuity. In the case of minors, your only option is to use the plan assets to purchase a term-certain annuity that will pay out on a taxable basis by the time the child is 18.
If your child or grandchild has a disability, it may be possible to transfer your plan assets to a registered disability savings plan (RDSP), or to a Lifetime Benefit Trust (LBT) if the child has a mental impairment, where the LBT can purchase a “qualifying trust annuity” to pay out over the life of the child.
Next time, I’ll share other ideas related to naming beneficiaries.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
