RRSP beneficiary, Our Remarkable Plan On How
The Income Tax Bill On Death From An RRSP Can Be Reduced.
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RRSP beneficiary: Death of an RRSP and you
As I have written before, in addition to insolvency work,
we also act as an independent estate trustee through our business.
Smith Estate Trustee Ontario.
In our work as estate trustee of a deceased estate,
we have come across an interesting topic when it comes to the will of the deceased.
In the inheritance of an RRSP beneficiary, understanding the tax implications
of a beneficiary entitled to an RRSP inheritance can save or cost you thousands
of dollars depending on how the RRSP is administered.
The Canada Revenue Agency (CRA) has specific
rules regarding what happens to an RRSP when its owner dies.
Did you know that there are a number
of tax implications that come with inheriting an RRSP?
This is especially true when you are
inheriting from distant relatives like grandparents, aunts, uncles or cousins.
An assignee of a registered Retirement Savings Plan (RRSP)
you are entitled to all of the funds
in the plan, but it is possible that the account
balance could be taxable. In this Brandon's Blog I discuss the income tax
ramifications on an RRSP beneficiary. By definition,
since it is an RRSP available to be inherited rather than a Registered
Retirement Income Fund (RRIF) or an annuity,
I am talking about someone who died before turning 72 years
old and never had the opportunity to enjoy retirement.
I remind you that I am not an income tax
practitioner, but rather I am a licensed insolvency trustee.
So this Brandon's Blog is not meant as income tax advice and should not replace
the advice of your qualified income tax advisor.
RRSP beneficiary designation: Designating your estate or other beneficiaries.
Setting up an RRSP is a great way to save for retirement.
You contributed to your plan each year and got a tax break from the government.
This is a fantastic deal.
So many people take advantage of it.
If you only name the heir or heiress in your will, that should be sufficient.
However, a will can be challenged. If you
don't name one at all for your plan, or if you are not a special type
of grantee, there can be some serious tax implications.
The inheritor you name for your RRSP
during your lifetime is the person who will receive the asset after your
death. You can appoint a recipient directly in your RRSP plan document much
in the way that you name one for your life insurance policy.
I recommend that you do this.
Do not just name your estate and then
maybe name the real RRSP beneficiary in your will.
The CRA has adopted a special policy regarding the tax treatment of RRSP.
This policy is referred to as the deemed disposition rule.
The deemed disposition rule applies to RRSP
when the holder of an unmatured RRSP passes away.
CRA deems that the RRSP was disposed
of and the funds received right before their death.
The calculation of the funds received is an amount equal to the reasonable market
price of all the property kept in the RRSP at the time of death.
This amount, and any other balances
the deceased got from the RRSP in the year of death need to be reported
on the deceased's year of death income tax return.
RRSP beneficiary tax implications, how can the income tax bill on death be reduced?
Understanding the tax implications
of an RRSP beneficiary entitled to an RRSP inheritance can save or cost you thousands
of dollars depending on how the RRSP is administered.
The CRA has specific rules regarding what happens to an RRSP when its owner dies.
When a person passes away and leaves an RRSP, their estate has to pay
the income tax liability on the RRSP when it's paid to the RRSP beneficiary.
However, you should first ask who is a qualified beneficiary?
Eligible individuals who can qualify
for such beneficiary designations are a spouse, a common-law partner or
a financially dependent, (infirm) child or grandchild.
They can utilize the qualified beneficiary
RRSP exemption to reduce or remove the tax obligation.
If there is no qualified beneficiary, the estate trustee will have to pay income
tax calculated based on the entire amount of the RRSP.
So the challenges for beneficiaries in general are twofold.
1. Are you a qualified beneficiary?
2. Can a qualified beneficiary reduce their income tax bill?
If you inherit an RRSP that someone will face a tax bill from CRA on the deemed disposition on death.
The RRSP value will be taxed as income.
Now there are some situations in which you can reduce or eliminate the taxes.
If the RRSP beneficiary is a qualified
beneficiary, then the value of the RRSP can be taxed in the hands of the RRSP
beneficiary, not the deceased's estate.
RRSP beneficiary tax: Reduce the tax by rolling over.
This first step of the rollover procedure is described as a refund of premiums.
The second step is the tax deferral portion, where a qualified beneficiary
adds the number of assets from the deceased's RRSP in the year
received or within the first 60 days of the next year.
The qualified beneficiary can declare
a tax deduction under Section 60(l) of the Income Tax Act Canada
to eliminate the RRSP amount added to their income.
This maneuver does not require the RRSP
beneficiary to have sufficient RRSP contribution room for the result.
This heir or heiress becomes the successor annuitant and then gets a tax-deferred
rollover to eliminate the tax on receipt of the RRSP funds.
The RRSP assets are directly moved to the qualified beneficiary's RRSP.
At tax time, the qualified beneficiary gets a T4RSP tax slip.
The qualified RRSP beneficiary then includes the date of death with the RRSP amount
in their taxable income, but offsets it with a Section 60 tax reduction.
The above rollover is typically seen when
a qualified beneficiary is marked as the RRSP recipient.
When this happens,
the RRSP proceeds generally bypass the deceased's estate,
lowering probate fees where applicable and sidestepping the estate creditors,
as well as the need for complicated estate settlements.
CRA RRSP Beneficiary Rules: Who pays tax
on inherited RRSP if the beneficiary is not a spouse, common-law partner or
financially dependent children or grandchild - but is the Estate?
One of the most common errors made when determining the recipient
for the RRSP is to assign the estate itself.
This would permit the estate to receive the tax deferred growth that has actually
been earned by the RRSP up to the date of death.
However, it would additionally mean that the estate would be responsible
for shouldering the tax burden on the distribution of the RRSP.
This is not necessarily wrong, but from an estate planning perspective,
it is the most expensive route to choose. Estate planners certainly would not choose this
way unless for some reason there was no other choice.
The RRSP beneficiary problem we are
dealing with or how to destroy an inheritance.
The issue we are dealing with on a particular deceased estate file
blends insolvency work with the work of an estate trustee.
The deceased did not file income tax
returns for the last few years of her life.
We now have a pretty good handle on her
income taxes and what her liability is for the years of unfiled tax returns,
as well as the tax liability that will arise from the estate trust tax return.
Based on what I have already told you
about the taxation possibilities for an RRSP beneficiary and what I am
about to tell you, there is a huge problem for an RRSP beneficiary.
For confidentiality reasons.
I cannot provide names and amounts, but I will explain the problem.
The deceased maintained a self-directed
RRSP contract through Royal Bank of Canada at Royal Bank Dominion Securities.
The named beneficiary in the registered
retirement savings plan document was a relative.
This relative does not meet the definition of a qualified beneficiary.
So in the normal course, the estate trustee would work
with the RRSP beneficiary to understand if there was going to be no taxable income
inclusion because an RRSP rollover was taking place.
If not, the estate should pay the tax,
but the beneficiary obtains 100 percent of the value of the RRSP.
Another options is that the estate trustee could get the tax payable on the registered retirement
income from the RRSP beneficiary and pay the income tax.
The beneficiary could be left with the net amount in the tax would be paid.
So everyone is square. In the situation I am acting in.
The estate is insolvent.
There will not be enough money in the estate to pay all the income tax
owing regardless of the source of the taxable income.
The RRSP beneficiary also, as I understand it, did not elect an RRSP rollover.
So now in this case where the estate has
insufficient funds to pay the taxes payable in full and the RRSP beneficiary
is not a qualified beneficiary and did not do an RRSP rollover.
The RRSP beneficiary will be liable
for the income tax payable from the RRSP plan assets received.
The real problem is that the year death and therefore the year the RRSP
beneficiary received their inheritance was 2018.
We were appointed late in 2019 and we just
now have been able to quantify the income tax payable.
So it will be 2021 or later that CRA may
go to the RRSP beneficiary with their hand out.
I don't know if the RRSP beneficiary
invested it all, spent it all or a combination of the two.
This, my readers, is how to destroy an Inheritance RRSP beneficiary summary.
I hope you enjoyed the RRSP beneficiary Brandon's Blog post if you were concerned
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