What Happens to an RRSP Upon Death?
To put it rather simply, a Registered Retirement Savings Plan (“RRSP”), is a tool created by the Government of Canada designed to help individuals invest and/or save for their inevitable retirement. The RRSP program provides incentives to individuals who contribute to it in the form of tax advantages, in order to encourage individuals to save. For a detailed breakdown of what an RRSP is and all its advantages, please refer to the hyperlink above.
What is an RRSP Annuitant?
As defined by the Government of Canada, a registered retirement savings plan (RRSP) annuitant is the person for whom a retirement plan provides retirement income.
What happens to the RRSP funds upon death?
The Canada Revenue Agency (“CRA”) has attempted, over the years, to clarify this matter for individuals to adequately prepare for death’s financial consequences. Generally, upon death of the annuitant, the RRSP issuer (usually a bank or trust company) will prepare a slip to describe how the funds from the RRSP account are to be paid out.
There are three distinct periods that matter for our purposes:
- The day the annuitant died;
- From the day after death until December 31 of the year after the year of death; and
- From January 1 of the year after the period described in #2 to the date the RRSP property is distributed.
These periods are used to calculate which individual will be reporting the RRSP value on their tax return and will determine which slip the RRSP issuer issues to the individual.
Day the Annuitant Died
The amount of the RRSP for the purpose of this section will be deemed to be the Fair Market Value (“FMV”) of the RRSP account. The CRA considers that the annuitant received the amount at the time of death, so the amount will be reported in box 34 of a T4RSP slip issued by the issuer. The annuitant will be the individual who must report the amount on their final tax return for the purposes of this section.
Day after Death until December 31 of the Year after the Year of Death
This section will depend highly on whether the RRSP is matured or unmatured. A matured RRSP is one that is actively paying out income to the annuitant, whereas an unmatured RRSP has not yet started to pay a retirement income. For both matured and unmatured accounts, the amount to claim will be the income earned in the RRSP during the subject period. If the RRSP is unmatured, the income paid to the beneficiary is reported in box 18 of the issuer’s T4RSP slip, whereas if the RRSP is matured, the income is reported in box 28 of the T4RSP issued to the beneficiary.
For the purpose of this section, the beneficiary of the RRSP is the individual who will have to report this amount on their tax return (that being the income earned in the RRSP during the subject period).
January 1 of the year after the period described in #2 to the date the RRSP is Distributed
The RRSP amount is calculated the same way as above, that being the income earned in the RRSP during the subject period. Once again, the beneficiary is the individual who will have to report this amount on their tax return.
General Rules applying to a deceased annuitant’s RRSP
When the annuitant of an unmatured RRSP dies, the CRA considers that the annuitant received, immediately before death, an amount equal to the fair market value of all the property held in the RRSP at the time of death. This amount and all other amounts the annuitant received from the RRSP in the year must be reported on the annuitant’s income tax and benefit return for the year of death. However, a beneficiary will not have to pay tax on any amount if it can be reasonably regarded as having been included in the deceased annuitant’s income (this is done to avoid double taxation on both the deceased annuitant, and the beneficiary).
However, amounts paid from the RRSP, which represent income earned in the RRSP after the date the annuitant died, must be reported by the beneficiaries (given that these amounts would not have been claimed on the deceased annuitant’s final tax return, someone must pay taxes on that money).
Overall, the next steps following the death of an RRSP annuitant are complicated, and if not executed correctly, can bring about unwanted tax consequences. If you have any questions or need any assistance regarding RRSPs, or any tax matter, please feel free to call us toll free at 877-921-8423 or email us at email@example.com.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.