Taxes on the Value of RRSPs
Last week, the Globe and Mail published an article on RRSP Myths, which is a timely subject with the deadline for contributions fast approaching. It dealt briefly with the taxation of an RRSP on the death of its holder.
The general rule is that, upon death, the holder is deemed to have withdrawn all the funds in the RRSP as at the date of death and will be taxed on the entire amount. This means that, generally speaking, the estate of the holder will pay the taxes, not the beneficiary of the RRSP.
The value of the RRSP is required to be reported on the deceased’s terminal tax return as part of his or her income in the year preceding death. Depending on the RRSP’s value and the total income of the deceased in that year, the proceeds of the RRSP might end up being taxed at the highest marginal value.
There are some circumstances where the estate will not be required to pay taxes on the RRSP:
- If the beneficiary of the RRSP is the spouse or common law partner of the deceased, then the RRSP funds can be transferred to his or her RRSP or RRIF, or they can be used to purchase an annuity.
- If the beneficiary of the RRSP is a financially dependant child or grandchild under the age of eighteen, the funds can be transferred to him or her to purchase an annuity. If the beneficiary is a financially dependant, mentally or physically infirm, child or grandchild of any age then the funds can be used to purchase an annuity or transferred to his or her RRSP or RRIF.
Another option is to designate a charity as the beneficiary. While the estate will still be liable to pay taxes on the value of the RRSP, it will be eligible for a tax credit, the effect of which is normally to offset the tax on the distribution.
For more information on these issues, check out the CRA Information sheet on the Death of an RRSP Annuitant.
Have a great day!