ByCanada Life | Jan. 25, 2023
John Yanchus, CPA, CA, TEP, Director, Tax and Estate Planning
It’s important to help your clients understand how different tax implications can affect their estate planning. In the event of their death, these decisions can have significant impacts on theirregisteredretirement income fund(RRIF).
Howis an RRIF taxed at death?
The general rule is that at their death, the annuitant (person who is entitled to the retirement income) is deemed to receive an amount equal to thefair market value (FMV)of all the property held within the RRIF at the time of death. All amounts received from the RRIF during the year are reported on the annuitant’s final income tax return.
The rules for taxation on death for a RRIF annuitant are almost identical to those for RRSPs.
Exceptions
- Successor annuitant – Where the spouse1is named as the successor annuitant of the RRIF and is entitled to all amounts paid after the date of death, the successor annuitant will be taxed on the amounts received. The deceased annuitant therefore doesn’t include any amounts received from the RRIF at deathon their final return.
- Sole beneficiary – There’s an exception to thegeneral rule. It results in no amount being included in the income of the deceased. If all the following conditions are met, then the spouse will receive the FMV inclusion in their income. They'll also receive a receipt for the amount that was transferred. They can use this receipt to offset the inclusion of income. This results in a tax deferral for the spouseuntil funds are withdrawnfrom their registered plan.
Conditions
- The spouse is the sole beneficiary of the RRIF.
- The RRIF property is either directly transferred to a registeredplan2under which the spouse is the annuitant or member, or to a life insurance company to purchase an eligible annuity for the spouse, by Dec. 31 of the year following the year of the annuitant's death.
Optional reporting foran RRIF
If the exceptionsdon’t apply, there’s another option for reporting on the client’s personal tax return, which allows the deceased annuitant’s legal representative to redistribute income between the estate and a qualifying survivor if the amount qualifies as adesignated benefit.This deduction is discretionary and allows the legal representative to report the income on either individual’s personal tax return.
Qualifying survivor
- The deceased annuitant’s spouse
- Financially dependent child or grandchild
A child or grandchild would be considered financially dependent if they normally live with and were dependent on the annuitant before their death. They must also meet one of the following conditions:
- The child or grandchild's net income for the previous year was less than the basic personal amount (under 18-years-old).
- The child or grandchild is physically or mentally impaired and their net income for the previous year was equal to or less than the basic personal amount plus the disability amount (any age).
A child or grandchild ordinarily living with and dependent on the annuitant before their death, but who was away from home to attend school, would still be considered as living with the annuitant.
Designated benefit
- Any amount paid from the RRIF to aqualifying survivor.
- If paid to the annuitant’s estate, the amount will qualify as adesignated benefitif both the following conditions are met:
- There’s a qualifying survivor who is a beneficiary of the annuitant’s estate.
- The annuitant’s legal representative and the qualifying survivor jointly file T1090,Death of a RRIFAnnuitant –Designated Benefit or Joint Designation on the Death of a PRPP Member.
When a qualifying survivor receives a designated benefitthe amount eligible for the rollover is reduced by the minimum payment from the RRIF. This must be included in the deceased’s return for the year of death.
The only option for a financially dependent child or grandchild (without a physical or mental impairment) to receive a designated benefits= is through an annuity for a period of not more than 18 years, less the child’s age at the time the annuity is purchased. For example, if the child is 12 years old, the period can’t be more than six years(18-12)). The payments from this annuity must start no later than one year afterthe purchase. The transfer or purchase must be completed in the year the refund of premiums is received or within 60 days after the end of the year. The income is taxed to the child or grandchild as the annuity payments are received.
If there’s no beneficiary named, the RRIF property will be included in the deceased annuitant’s estate and be governed by their will. If the designated benefit is being allocated to the beneficiary through the will, the legal representative and the beneficiary must file a joint election to have the amount taxed in the hands of the beneficiary.
Beneficiaries
The named beneficiary of the RRIF will receive the amount paid out of the RRIF, tax free, if the amount is included in the deceased annuitant’s income. Ifincome earned in the RRIF after the date of deathis included in the amount paid from the RRIF,then the beneficiaries must include this amount in their income in the year received.
The deceased’s estate is typically liable for any taxes resulting from the RRIF. However, the beneficiary is jointly andseverallyliable with the deceased annuitant for the taxes owing relating to the RRIF. This situation may arise when the estate is insolvent or may not have enough assets to cover the tax liability arising from the RRIF.
Planning opportunities
Beneficiary designations
It’s importanttohelp your clients have a plan before they die. Using beneficiary designations can prevent the assets from being included in the estate and being governed by the will.Estate planning and probate planning can be accomplished together using beneficiary designations from registered accounts and insuranceproducts. Generally,naminga beneficiary (other than the estate) ensures that, except in limited cases, that the death benefit passes outside of the estate and it's not subject to probate. Be aware that beneficiary designations are only one planning component of overall estate and probate planning.
There may also be situations where benefits are lost if a designation is not made or if the timing of certain options isn’t considered as there are time restrictions in place for various transfers and benefits.
Clients should review their existing RRIF beneficiary designations after life events or other changes to ensure the designations are up-to-date and in accordance with their desired estate planning objectives.
Optional reporting opportunities
- There may be opportunities to reportthisincome in the personal tax return of the deceased if there are unused losses or low taxable income for the year (for example, if the death occurred early in the taxation year).
- There may be opportunities to remove the income from the estate of the deceased and report it by the beneficiary if they have a lower marginal tax rate.
Summary
Upon death, taxation can’t be avoided, but there may be opportunities to defer it into the future.Planning options may be available to the beneficiaries and the legal representatives of adeceased's RRIF. The options may include reviewing the marginal tax rate(the rate of additional federal income tax to be paid on additional income)applicable and who pays the tax.
Do your clients have an RRSP or a TFSA? Refer to these articleson how to incorporate similar planning for other registered plans:
- Advancedtaxandestateplanning:taxation at death ofan RRSP annuitant
- Advancedtaxandestateplanning:taxation at death ofaTFSAholder
This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circ*mstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of January 2023.
Canada Life and design, and Canada Life Investment Management and design are trademarks of The Canada Life Assurance Company.
