Death of an RRSP/RRIF Annuitant – Do tax-deferred rollovers make sense?

Why a tax-deferred RRSP rollover isn’t always the smartest move at death

When an RRSP or RRIF annuitant dies, the deceased is normally required to include the full value of the plan in income for the year of death where the amount is subject to tax on the deceased’s terminal tax return. Exceptions apply if a spouse, common-law partner or financially dependent disabled child or grandchild (qualified beneficiaries) inherit the assets. In this case, a tax-deferred transfer (“rollover”) is available if the proceeds are contributed to an RRSP, RRIF, PRPP , SPP  or qualifying annuity for the qualified beneficiary.

When an RRSP annuitant dies, families quite often take advantage of the tax-deferred transfer where available without considering other options. Doing so saves tax at the time of death and defers the eventual tax liability to when the qualified beneficiary draws funds from their
registered plan or dies. There are some situations where a tax-deferred transfer might not be the best option.

Consider the following common scenario:

Kevin, a resident of Ontario, died on March 15, 2020. He is survived by his higher-income earning spouse, Susan, and two children. At the time of death, Kevin had an RRSP valued at $200,000 with Susan named as the beneficiary. Prior to death, Kevin’s employment income was
$13,000.

If his RRSP is transferred to Susan’s RRSP on a tax-deferred basis his taxable income for the year would be $13,000. It might make sense to defer the transfer understanding the eventual tax liability could be higher at Susan’s retirement, including any future inheritance from her family. All or part of the proceeds can be taxed in Kevin’s hands for the year of death where lower tax rates can potentially apply.

Administratively, how is this achieved? In CRA guide RC4177, Death of an RRSP Annuitant, the CRA states that when an RRSP annuitant dies, a T4RSP slip is issued to only the spouse or common-law partner of the deceased provided the following two conditions are met:

• The spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP.
• By December 31 of the year following the RRSP annuitant’s death, all the RRSP property is transferred directly to an eligible plan (e.g., RRSP, RRIF, PRPP, SPP or qualifying annuity) for the spouse or common-law partner.

Where these conditions are met, the T4RSP slip, reporting the date of death RRSP income ($200,000 in this case), would be issued to the surviving spouse (not the deceased) who would offset the income inclusion with a tax deduction 4  for transfers to an eligible plan.

If Susan requested a cash payment instead of a full transfer to an eligible plan, the T4RSP slip would be issued to the deceased, which allows for the date of death amount to be taxed in the deceased’s final tax return. Note, with this option, the entire amount ($200,000) does not need to be taxed to the deceased; Susan’s executor/liquidator can decide how much income to tax in Kevin’s final return. Using Chart 2 of CRA guide RC4177 any excess amount could be transferred to Susan. If the excess amount is contributed to Susan’s RRSP, RRIF, PRPP, SPP
or annuity, it could be sheltered from tax with an offsetting tax deduction.

Tax minimization is an effective way to build wealth. When considering tax planning, consider taxation at the time of death and the named beneficiary. Depending on the circumstances, certain strategies can help to minimize the longer-term tax cost and maximize
wealth for families.