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.
