My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, November 26, 2012

RRSP/RRIF Spousal Transfers on Death - Not so Automatic – Be Careful you don’t Create a Family War

Most people are aware that upon their death, their RRSP/RRIF can automatically transfer tax-free to their spouse’s RRSP/RRIF if their spouse is the beneficiary of their plan. The advantage of this spousal rollover is that the income tax on the value of the RRSP/RRIF is deferred until the surviving spouse passes away.

However, if the surviving spouse has other ideas and does not transfer the proceeds of the RRSP/RRIF to a plan of their own, the possibility exists that they could end up keeping the proceeds of the plan while leaving the related income tax liability to be paid by the deceased’s estate. While this can be an issue for any family, for blended families, this has the potential to ignite World War 3.

I recently attended the Ontario Tax Conference. The participants were lawyers and accountants, most of whom specialize in income tax. I know a room full of accountants and lawyers talking tax, what could be more torturous. However, there was actually a very outgoing and passionate presenter by the name of Christine Van Cauwenberghe of the Investors Group. 

Christine presented the technical details relating to this issue, from the mechanics of the “refund of premiums” to the administrative withholding requirements for financial institutions. But, in simple terms, this is what you need to understand.

When you designate your spouse as the beneficiary of your RRSP/RRIF, they will receive the proceeds of your RRSP/RRIF directly. It will then be his/her responsibility to transfer the entire proceeds to their RRSP/RRIF. If they do that, the bank issues the tax receipts in their name and there are no income tax consequences, end of story. 

However, your spouse has no legal obligation to transfer these funds to their RRSP/RRIF. In fact, where your spouse rather use the funds immediately, does not get along with your natural children or is from a second or third marriage and has his/her own children and/or does not get along with their step-children, they may decide to take the money themselves and not transfer the funds to their plan. In these circumstances, the tax receipt for the RRSP/RRIF will then be issued to the deceased’s estate. While the spouse may be held jointly and severally liable by the CRA for the related income tax, if the estate has enough assets, the CRA will typically go after the estate for the taxes, not the spouse.

In order to avoid this potential minefield, Christine suggests that you designate your estate as the beneficiary of your RRSP/RRIF, with a clause that provides two alternative options:

Option 1: The beneficiary (your spouse) chooses to elect with the executor(s) to have the RRSP/RRIF amount taxed in their own name as a refund of premiums. Under this option, the spouse receives the entire RRSP/RRIF proceeds and typically transfers the proceeds to their RRSP/RRIF and the estate assists in filing an election. The required election form is Form T2019, however, you would probably not want to name a specific form in the will, only that there is an option to elect.

Option 2: If the spouse does not agree to the joint election, then they are only entitled to an allocation of the RRSP/RRIF funds net of the associated income tax liability to be incurred by the estate.

A disadvantage of designating your estate as the beneficiary of your RRSP/RRIF is that the funds will be subject to probate in most provinces. Some people feel that the probate fees (1.5% of the value of the RRSP/RRIF in Ontario) are a relatively small cost in order to prevent the potentially disastrous result of your spouse taking the entire proceeds of your RRSP/RRIF and leaving the estate to pay the related income tax.

If your spouse and children do not get along, or you have a blended family, you may wish to review this issue with the lawyer who drafted your will.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

19 comments:

  1. What if the RRSP is in Segregated funds offered by the Insurance companies, these funds bypass the probate fees anyway. Regards Sandisethi.ca

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    1. Sandi, I need to confirm this, but I think you only bypass probate if the funds are left to your spouse. However, this still leaves you with the real problem being, your spouse can take the money and leave the tax bill to your estate.

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    2. Sandi, Christine has kindly provided this response to your question

      Sandi – seg funds bypass probate only if you designate a direct beneficiary. The point of my presentation is that a direct beneficiary designation is not appropriate in all situations, and people don’t realize that with a registered plan a surviving spouse could choose to take the gross amount in the plan, leaving the estate with the tax bill. In the case of a non-registered seg fund, a client may want to designate a beneficiary in the “protected class” if they are buying the fund for creditor protection – but in that case they still need to keep in mind that the capital gains tax liability will go to the estate even though the funds themselves will go to the direct beneficiary. In the case of a registered beneficiary, I would doubt that creditor protection would be a major issue, since registered funds usually already have creditor protection – if your client bought the seg fund for the guarantee feature (ie. either the guarantee payout at death, or the lifetime income benefit), then designating a direct beneficiary is probably not a priority for them. You should confirm with them whether avoiding probate is a priority – a lot of clients don’t understand that probate fees are extremely low across Canada, and they don’t realize the disadvantages of designated a beneficiary – if they are in a blended family, it may not be recommended. I find that once I explain to clients that having an asset go through probate usually leads to a more equitable distribution of their estate, they are more than happy to pay the probate fees and get rid of the direct beneficiary designation (again, assuming creditor protection is not an issue).

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  2. Choosing the right lawyer is insurance you have everything in place. Otherwise, it will lead to a family war.

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  3. Is there any Canadian case law or legislative provisions that address this situation?

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    1. Hi Anon:

      I am not aware of any case law and I have had a tax lawyer tell me they take a different interpretation than Christine on the above. Thus, I would seek a professional opinion.

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  4. Please help! My mother passed away in DEC 2014,she had RRSP's and we assumed that they would just roll over to my dad.

    We filed her 2014 taxes and paid amounts owing and thought all is well. Turns out she named no one in her RRSP forms as a beneficiary, What to do now? She did leave a will naming my dad as executor with ability to distribute assets as needed.

    We want to transfer RRSP to my dad tax free, he also already filed his 2014 taxes. Do we now have to file T1 adjustments for them both with the t2019 form? How would we then get the bank to issue the taxes in his name since no beneficiary was named? This is so confusing.

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    1. Hi Anon

      Unfortunately, the estate may have an issue. You need to speak with an estate lawyer to see if you can do anything, I cannot provide you advice on this matter.

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  5. In contributing to a spousal RRSP for several years, all my contribution room has been used up. I am named as the beneficiary. However, if my spouse were to die, I would have no RRSP contribution room in my own name. Would the fact that I had used my original contribution room to build the spousal RRSP mean that the full RRSP could then simply be transferred to me as an intact RRSP 9i.e., would my effective "transfer" of RRSP contribution room to my wife be recognized)? I am confused as to how the "lost" contribution room wouldn't translate into tax implications since I am unable to set up an RRSP of my own.

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    1. Hi Anon

      If you are like most spouses, you are probably the beneficiary of your wife's RRSP and if she died, her RRSP would transfer tax free to you and thus, you have in essence got all your RRSP contributions back. You would then make your own yearly contributions going forwward

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  6. My understanding is that if the spouse (wife) is beneficiary of husband's RSP, then the husband's RSP can be rolled over tax free to wife's RSP upon husband's death? Even if the wife does not have any contribution room available on her RSP? i.e. contribution room is not a consideration in these instances. If you could confirm, thank you.

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    1. Hi Anon

      Correct, the contribution room is not relevant.

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  7. I am the executor of my moms will. She passed away last March 2017. The RIFF that she had she left to my dad. All the paper work was done so he could claim the RIFF but he refusing to go sign the papers at the banks to claim. Is there some kind of time limit as to when has to claim them and what options do I have?

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    1. Hi Anon

      This is a very strange situation I have never encountered. I cant help, you should speak to the bank about your questions.

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  8. An RRSP was left to an estate so the executors could control the money. The spouse was a financial spendthrift. To avoid tax the executors made a T2109 designation with the spouse and controlled the funds. The spouse promptly moved the funds to a new institution and absconded with the funds. Does filing the T2109 constitute a legal transfer or does the estate still own or control it in law

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    1. I don't know you need to ask your estate lawyer

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  9. My wife passed away last year. Her RRSP was rollover to my RRSP. I just received the T4RSP slip in my name with the rollover amount in Box 18 (Refund of premiums). Will I receive another bank issue slip to offset the T4RSP? Thanks!

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  10. When the RRIF from your deceased wife is transferred to your RRIF, where do you show the offsetting amount on the income tax form?

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