Naming An RRSP Beneficiary
An RRSP allows for a designation of a beneficiary who will receive the proceeds upon the death of the plan-holder. Naming your RRSP beneficiary is very important. Upon your death the market value of the RRSP can be taxed as earned income on your terminal tax return depending on who you name.
Depending on the value, RRSP holdings can easily be taxed at over $100,000 (40% or more of your plan) unless you name a “qualified beneficiary.” You can name your beneficiary directly on your RRSP application (the easiest way) or you can make the designation in your will.
Qualified RRSP Beneficiary
Taxes can be deferred by naming your spouse (by marriage or common law) or your financially dependent children or grandchildren as qualified beneficiaries.
Spouse: In most cases this is the easiest solution. The RRSP is included on the terminal tax return but there will also be an offsetting deduction for the same amount so no tax is paid on the rollover. The actual transfer must be made before December 31 of the year following the death of the planholder. The spouse will only pay tax on withdrawals from the plan.
Dependent Children: The child must be financially dependent on you at the time of your death and either a minor or mentally or physically infirm. In the case of a minor child who is not infirm a term annuity must be purchased with the plan assets that will make payments each year until the child reaches age 18. For a child who is infirm, the proceeds can be transferred on a tax-free basis to his or her own RRSP or can be used to buy an annuity. In both cases, taxes are paid on the payments or withdrawals made.
Other Beneficiaries
Adult child, other relative, or friend: No tax-deferred options areavailable if your children are adults and not infirm, even if they are financially dependent on you. Proceeds will be fully taxed on death. The entire RRSP proceeds will go to the beneficiary. The tax liability will go to the estate, which will likely leave less money than you intended for your other beneficiaries so this must be carefully considered.
Charity: You can name a registered charity as your RRSP beneficiary. The final tax return will be entitled to receive a donation credit for the value donated. This can offset the tax owing.
Estate: Taxes will be paid on the final return for the value of the RRSP. The assets will also be subject to probate fees.
Conclusion
When you convert your RRSP to a RRIF it becomes a separate plan so you need to make sure you name an RRSP beneficiary again.
Naming a beneficiary is a very important part of tax and estate planning. The RRSP (or RRIF) will not form part of the estate assets, which may require probate. The assets will transfer directly to the beneficiary, which may result in significant savings.
Finally, review your RRSP beneficiary designation whenever there is a change in your personal circumstances.
My husband and I are Successors, not Beneficiaries
on each other’s RRSP’s.
Why are there the two terms?. And what
happens if you designate a spouse as
a beneficiary.
Thank You.
Hi Cathryn: It is my understanding that a successor is used for a RRIF. A RRIF gives the option as a beneficiary to have the spouse receive the proceeds as a lump sum – either collapsed (taxes will be payable) or rolled over to the surviving spouse’s RRSP or RRIF and taxed on withdrawal.
With the successor designation the surviving spouse continues to receive the RRIF payments originally set up by the annuitant.
If the spouse is qualifed beneficiary and designated in the plan or will (rrsp paid out before exempt period) the rrsp payout will not be included in the terminal return of the deceased. It will be included in the spouse’s tax return(T4RSP) and will be offset with contribution tax receipt.
A. Rajah: Thanks for pointing out my error. The RRSP and the offset do go on the spouse’s tax return.
Thanks for the insight. Recently I was wondering if I could name an animal shelter in town as a beneficiary for my RSP and this says I can. Keep up the good work!
Hi Tobias. Make sure the shelter is a registered charity and you’ll be fine.
Thank you for the article. I read studies several sources on the RRSP’s already, and it is still not clear to me, whether any tax is withheld in addition to the estate accepting the liability. Could you please help me understand? My mother passed away. I am a beneficiary for 50%, the other 50% go to my dad. Let’s say the sum is 100K. I understand that 50K will be added to deceased’s taxable income for past year. Will I receive 50K minus this tax? Is there another type of tax for withdrawal? Will it be added to my taxable income for the year?
I am very confused.
Thank you in advance!
Hi Amarantha. I’m sorry to hear about your mother. I’ll try to answer your questions.
1. If the estate is named as beneficiary, the RRSP proceeds are taxable on the final return of the deceased planholder.
2. If there are enough assets after taxes are paid, you will get the full $50,000 tax free. If not you will get the $50K less tax.
3. Your dad and the executor jointly can elect in writing to have RRSP proceeds paid to the surviving spouse. This election must be attached to his tax return and specify that he is electing to become the annuitant of the RRSP. It is then rolled over on a tax free basis.
4. You will not have to pay any tax yourself on the amount you receive and it will not be added to your taxable income.
I hope this answers your questions. Good luck.
When the will is going to probate do you require the rrsp(with named beneficiary) to be included in probate or can the executors release it to the beneficiary before probate.
The rrsp are worth approx 100,000.00.
Only one executor went with is wife to the investment rrsp person and got the papers for the beneficiary to sign.
@Jayne: If the beneficiary of the RRSP is named (not estate) it will bypass probate and the entire amount goes to the beneficiary. However, taxes will still have to be paid if it is not a “qualified” beneficiary where the RRSP is rolled over into their name.
In April 2012 my ex’s mother died, and I am helping her with her mother’s estate. In her Will my ex’s mother named her sons and daughter as beneficiaries so her estate would be divided “…in equal shares per stirpes…” Both of her sons predeceased her, one was unmarried with no children while the other had been married with four daughters. I know that my ex’s mother’s estate is divided whereby my ex receives 50% of the estate, and each of her nieces receive 12.5%. The issue is not how her estate is divided, rather, how her RIF is divided.
At the time my ex’s mother set-up her RIF, in the documentation at the bank, she named her daughter and her married son as beneficiaries. From what I have read it appears the division of assets from my ex’s mother’s RIF is separate from the Will governing the disposition of her estate, and is therefore not governed by the same stipulation. In other words, the entire RIF, after taxes, passes to my ex and nothing goes to her nieces.
Is this correct?
@George: In my opinion you are correct. The proceeds of a RIF plan are paid to the surviving beneficiary – in this case your ex-wife. Look at the legalize on the beneficiary document from the bank.
Beneficiary designations are governed by provincial law so you should clarify this with the probate lawyer, but I think the only exception would be Quebec.
I was named the beneficiary of an RRSP.
Now, the will is being contested. Can the RRSP be contested? Also, our lawyer is asking me why “I think that I was named beneficiary?”, and to send him any documentation that I have on this to him.
Do I really have to respond to this and try to explain why I was named?
I have no idea why I was named, and, there really is no explanation why. Maybe just because of all my siblings, I was a favorite, and was thought that maybe I could use the money more than the rest?
What should I do?
I will be trying to talk to a local lawyer in the coming week.
Thanks
@Rookie: Naming a beneficiary on the RRSP documents is legally binding. If you are not a spouse or dependent child, tax still has to be paid on the proceeds, but it avoids the amount being added to other assets when it comes to probate (probate fees are usually a percentage of total assets so this can save money).
In my opinion, you don’t have to justify why you were named. If I were you however, I would get legal council as it sounds like things could get nasty.
Good luck to you.
Wow, thanks Boomer for the quick reply.
I am not a dependant. When my father passed last year, I did receive the RRSP, plus the TFSP monies.
The RRSP taxes have been paid by the estate.
The will is being contested by two brothers right now, and, does look to be getting ugly.
It is mine, and another brothers lawyer who is asking for me to send him an explanation as to why I think I received this.
Also, finally, I do plan on getting legal counsel, besides the one I am sharing with the beneficiaries of the will.
Again, thank you for your input. Very much appreciated.
@Rookie: I wonder if you are having your current problems because, after paying fees and taxes, you may have ended up with the bulk of the estate. (?)
This is one issue people have to take into account when they are designating beneficiaries and thinking they are dividing assets evenly.
I understand you can name a beneficiary on registered accounts (eg. RRSPs, TFSAs) but not on savings or investment accounts. By naming a beneficiary such assets are not part of the deceased’s estate or will, and, in general, can’t be contested.
Can you do something similar for ordinary bank / investment accounts – or must they become part of the estate (and will) and subject to probate.
@Sammy: There’s no provision to name a beneficiary on regular accounts and investments (besides your will). The only other alternative is to make the accounts joint, but since this can cause all kinds of other issues, it shouldn’t be used just to save on probate fees.
Hi my sister changed her rrsp’s 2 weeks prior to death can her husband contest this even if he is sole heir
Hi, My aunt passed away and she named me as the beneficiary of her RRSP. When it’s redeemed I believe the cheque will be made in my name. In order to pay the RSP taxes on her last income tax return next year do I have to open a new account in her name as an estate or can I open it in my name and then pay the taxes right from there?
@Marko: The entire RRSP goes to the beneficiary, you in this case. If there are no other assets in the estate to pay the final taxes, you will have to pay them. There is no need to open an estate account in your aunt’s name just for this purpose.
Thank you for your response! After residue of the estate, there is a request in the will to give a % to a charity. Will I be able to use some of the RSP money I receive to give to the same charity in my Aunt’s name? or will it have to donated in my name?
@Marko: A charitable donation in the final tax return for the deceased/estate will reduce taxes owing. If you make the donation in your name it will reduce your taxes. Since I don’t know the complete estate details it may be best to get advice from a tax professional in this case.
My brother and I are the executors of my dad’s estate and equal beneficiaries of his RRSP. We eached received our half of the RRP proceeds and we were both instructed to hold back the tax money as theere are no assets in the estate. I have put money aside for my portion of the taxes and my brother had put his aside, but has since subsequently spent it. If I can prove that I have done everything in good faith and pay my portion of the taxes, am I held responsible for his share – as I have no control over his half of the RRSP payout.
THank you
Boomer, my grandmother passed last jan. her 3 daughters were named executors . Her will left land equally to 3 daughters and 3 grandsons. The remaining assets r to b equally split between 3 daughters and 2 granddaughters. I am 1 of the granddaughters sadly it’s ugly. She has named her youngest daughter as beneficiary of rrsp’s . Roughly $26000.00. So as I understand it and pls correct me if I’m wrong- gramma claims this as income upon death and estate pays taxes owing – beneficiary gets amount plus 20% of remaining assets. The war is on it’s 2 vs 2 with myself being the swing vote on whether to contest this. What does the law say ? Pls help! Beneficiary now has seperate lawyer . I’m sure gramma is rolling in her grave :'((
Alynn, I am not Boomer, nor a lawyer. I am just some one who has gone through this, and, well, after nearly three years, still going through this.
For us, the taxes from the RRSP did come out of the estate. Ask the beneficiary who received the monies to pay the tax portion on the RRSP. Other than that, leave it be. There was a reason Gramma left the money to them.
Also, in doing this and letting it go, the problems and court hearings will be over a lot sooner, and, a lot cheaper in the long run.
Even if the taxes are paid by the estate, it will be a lot cheaper for every one.
Again, not a professional opinion, just an opinion from some one who has been there.
Hope that it all works out.
Hi, is there any way that a bank would have forgotten to get someone to name a beneficiary on their rrsps. If this is the case, who would get the money. My dad passed away last year and the rrsps are now being handled. My mom stated that she can’t touch them because no name was listed. I am the daughter, and my mom is saying that the money will be going to my dads brothers and sisters. Is this true, if so, is there a way to fight this?
Hi Melissa. If there is no beneficiary named the spouse can elect, jointly with the executor of the estate, to transfer the RRSP by the end of the year following the plan holders death. Since it seems that this deadline has passed, your mom has to file a Form RC4177 (download from the CRA site) which permits the transfer.
The advantage – besides your mom getting the money, of course – is that the rollover is tax free until your mom starts taking withdrawals, and the RRSP amount is not added to the estate so not subject to probate fees.
One minor (17) and one adult child have been named beneficiaries of a RRIF. Can the RRIF be paid out to the Adult child and remain in for the minor? What is the process that needs to take place.
@Gina Kennedy. The adult child is paid out his or her portion of the RRIF. The proceeds for a minor child must be put into an annuity until age 18. Since this minor child is 17 you may be able to wait it out depending on the time frame before the estate has to be wrapped up. Contact the administrator of the RRIF for guidance.
Hi Boomer, I am one of the beneficiaries in my mom’s Will as well as the sole beneficiary of mom’s RRSP. Can an Executor (also a beneficiary in my mom’s Will) ‘contest’ or prevent an RRSP from going to the beneficiary because she feels mom would not have divided her assets unequally? This Executor is refusing to allow probate to happen because she is upset with mom’s decisions. The co-Executor is finding the situation very difficult, would like to move mom’s estate to probate and isn’t sure how to proceed; she recently found out that when mom wrote-up/signed her Will, she didn’t include or mention her RRSP – could this give my sister grounds to dispute mom’s beneficiary designation? Mom also told several family members of her intent with her RRSP and that she did not want it to form part of the estate to be divided equally among her children.
@direction please: Naming an individual(s) as beneficiary bypasses the will. The key benefit is that the value of the RRSP will not be included in the calculation of probate fees, but income tax still has to be paid on the final value.
You, or the other executor, should see your lawyer for advice on how to proceed with probate. Keep in mind that the final tax return has to be done by April 30 of year following death, so delaying can cause problems.
Good luck.
I understand that a financially dependent physically infirm child (any age) can be a beneficiary of an RRSP and have the funds rollover tax-free. What is considered financially dependent (how much can an adult child earn maximum)? As well, what is considered physically infirm (what about someone who wears an insulin pump because she has sever insulin dependent diabetes and also has secondary depression)?
@Mark. According to the CRA a physically dependent child is one who is dependent because of a physical or mental infirmity, resides with you and has a net income of less than the basic personal amount ($11,474 in 2016). If in doubt you should contact them directly.