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(Thursday, February 25, 2010)
RRSP Beneficiaries
Now that RRSP season is almost over, take some time to think about some of the less obvious issues regarding RRSPs. In the rush to make an RRSP contribution before the deadline, you may not have paid attention to an important point regarding your RRSP. Who will be the beneficiary should you die? No one likes to think of dying, but a little thought can result in leaving your heirs quite a bit more money when you do.
There are a number of special rules relating to the death of an RRSP holder contained in the Income Tax Act. In order for several important tax saving provisions to apply, a beneficiary of the RRSP needs to be designated prior to death. Did you designate a beneficiary other than your estate for your RRSPs, and did you designate the correct beneficiary?
Normally, when an RRSP holder dies, their estate pays tax on the fair market value of the RRSP at the time of the death, just as if they had cashed in the RRSP that day. This can result in a great deal of tax being paid in the year of death. If a beneficiary is named on the RRSP, then the funds are paid to the beneficiary, not into the estate. However, the estate still has to pay the taxes on the value of the RRSP. If the estate doesn’t have enough money to pay the taxes, the beneficiary who received the funds from the RRSP is liable for the remaining taxes.
There is one very important rule that you may not be aware of. If you name your spouse or common law partner as the beneficiary of your RRSP, and provide for the transfer in your will, then the RRSP transfers to your spouse tax free on your death. Effectively, the name of the holder of the RRSP changes to your spouse, and no tax is paid until the funds are withdrawn from the RRSP. This spousal rollover doesn’t use any of your spouse’s RRSP room, and doesn’t affect their income until they withdraw the funds. One important point is the spouse must be the SOLE beneficiary. If two or more persons are named as beneficiaries on an RRSP, the spousal rollover is not available.
There is a similar tax free rollover available for financially dependant children or grandchildren, who are under the age of 18, or are financially dependant due to a physical or mental infirmity. Generally, a financially dependant child or grandchild will have to have income less than the personal exemption amount of $10,320 (for 2009), and have been supported by the parent or grandparent.
The rules regarding RRSPs just discussed briefly are much more complex than they may appear. If in doubt as to the correct course of action, talk to your tax accountant and get their guidance.
