Death will result in tax implications for RRSPs, RRIFs

Unfortunately, this COVID-19 year has caused many of us to think about our own mortality, but it also gives us a lesson in taxes.

The federal deficit for 2019 was $26.7 billion but is estimated to balloon to $184 billion and quite likely more next year with COVID-related additional program spending.

Federal debt (accumulated deficit) as of March 31, 2019, was $685.45 billion (the highest in Canadian history). Interest on that debt amounted to $24 billion annually, fortunately at historically low interest rates but the possibility of future incremental increases may paint a more disastrous equation. It’s happened before.

The accumulated deficit amounts to about $18,300 owed by every man, woman and newborn child in the country, which in reality represents deferred taxes, which that we and others in the future will have to send to Ottawa on top of our regular taxation amount today.

Your Registered Retirement Savings Plan and Registered Retirement Income Fund are other examples of deferred tax plans but the government wants their pound of tax flesh when you withdraw the money from your accounts or are forced to withdraw. There are two situations in which you are forced to close your accounts. You must collapse your RRSP in the year you turn 71 and on the death of the account holder.

Generally, the fair market value of the RRSP or RRIF is included in the deceased’s income in their final tax return filed in the year following death. Any unused contribution is no longer available to the plan holder but may be used to make a spousal contribution up to 60 days after the end of year of death.

The accounts may be rolled over to qualified beneficiaries, thereby deferring the tax further. If the beneficiary is younger than 71, the transfer can be transitioned to either an RRSP or a RRIF. If the recipient is older than 71, the transfer can only be made to a RRIF or an annuity. Qualified beneficiaries include a spouse or common-law partner, a financially dependent child under the age of 18 or a financially dependent mentally or physically infirm child or grandchild.

The rollover must also be transferred to the beneficiaries’ RRSP or RRIF, or to an eligible annuity before the end of the year following the individual’s death.

The deceased estate doesn’t pay taxes on funds in the plans but any withdrawals after the rollover become the tax responsibility of the beneficiaries.

One potential trap, however, relates to the structure of the deceased’s estate. If there aren’t sufficient non-RRSP or RRIF assets to cover taxes owed, the Canada Revenue Agency, backed by the courts, determined that the beneficiaries are responsible for taxes owing on the estate.

Any fixed-term investments within the plans can be transferred in kind and allowed to mature or they may also be cashed out upon the death of the owner without penalty.

The fixed instrument fine print needs to specifically state that this is allowed. The plans may also continue to shelter growth up to Dec. 31 of the year following death.

There are many other issues affecting the transfer of RRSPs and RRIFs upon death, so it is important to seek the advice of the legal counsel and your own tax professional.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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