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From The Boomer & Echo Mailbag: Designating A RRIF Beneficiary

Q. I will soon be converting my RRSP into a RRIF. Currently the beneficiary is my estate. I was told I could save money if I named my children as equal beneficiaries. What are the tax implications of doing this?

When there is no “qualified” beneficiary – i.e. spouse or dependent child or grandchild – a RRSP/RRIF plan holder can name either one or more individuals, or his or her estate, as beneficiary. Each of these choices has different consequences.

Designating a RRIF beneficiary

Estate as beneficiary

When the estate is named as beneficiary, the entire amount of the RRSP/RRIF is combined with all your other assets and subject to probate.

Taxes are paid by the estate on the final year-of-death tax return.

After all taxes, fees and other expenses are paid, the remaining estate assets are distributed as instructed by you in your Will.

Naming one or more individuals

If you name your children as beneficiaries, the RRSP/RRIF is not subject to probate.

On death, the financial institution will pay the entire plan proceeds to the named beneficiaries. Nothing is held back for tax liabilities.   The estate is responsible for paying the income tax on the full amount.

The beneficiaries receive the investment portfolio at its fair market value on the date of death.

All income earned after the death of the plan holder and before it is distributed is taxable to the beneficiaries. Interest and dividend income are taxed as ordinary income and not eligible for the dividend tax credit. If investments are sold before distribution, any capital gains or losses are reported by the beneficiaries.

Can the estate pay the bills?

RRSP/RRIF proceeds and all other income received in the year of death (e.g. salary, CPP, dividends) are combined. This can push the total income into the deceased’s highest marginal income tax bracket. Depending on the remaining amount, a RRSP/RRIF can generate a six-figure tax bill.

Consider that if any Tax Free Savings Account and life insurance proceeds are also paid directly to beneficiaries, there may not be enough money left in the estate to pay bills such as funeral costs, capital gains on a cottage, probate fees and taxes.

If the estate is not large and there are not enough assets to pay the tax, the Income Tax Act considers the beneficiaries jointly liable.

Final thoughts

When RRSP and RRIF plans are opened, you are asked to name a beneficiary. Sometimes they are given without much thought at the time, and often never referred to again.

However, beneficiary designations should be carefully considered as part of your overall estate planning.

Problems can be created when estate planning is done with the aim of reducing taxes and fees at all costs.

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4 Comments

  1. Tom Laurie on October 28, 2016 at 6:07 am

    I believe there is also another issue with naming beneficiaries in insurance policies, RRIF’s etc. in that this money will flow to the beneficiary outside of the will and therefore can substantially alter how you may have wanted to distribute your estate. When creating a will people need to understand how naming beneficiaries on their assets will affect the ultimate distribution of their assets.

  2. Leah Mabie on October 28, 2016 at 6:20 am

    With TFSA make sure you complete Successor Holder to name a beneficiary to maintain the tax free status.
    ” The Income Tax Act only allows the tax exempt status of the TFSA to be passed on to a spouse or common-law partner who is a successor holder, which differs from a beneficiary. If some other person is named as a beneficiary of the TFSA, the account will no longer be a TFSA.Aug 26, 2015
    TaxTips.ca – Death of TFSA Holder
    http://www.taxtips.ca/tfsa/holderdeath.htm

  3. ian lewis on October 28, 2016 at 9:41 am

    To summarize. there are no income tax savings by naming children as equal beneficiaries. The only tax benefit is a reduction of Probate fees. However naming children as beneficiaries directly can cause significant complications for the estate. Its ok to name a spouse as a beneficiary.

  4. Lynda Robinson on October 28, 2016 at 10:52 am

    It was my understanding that the house will drag all the other assets into probate, even with designated beneficiaries listed on the accounts. The exception is Life Insurance policies. Just before my mother passed away, she put all the bank accounts and GIC’s, etc. into our names. In the end, I was able to keep the house out of probate, due to a rare technicality I had heard about. That is why you hear about many parents putting their house into their children’s names when they get older. I did extensive research on this when my mother passes away back in 2001. Maybe things have changed now?

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