Choose Your Beneficiaries Wisely

Have you chosen your beneficiaries wisely?  You’ve been saving diligently all your life.  Make sure the tax department isn’t the main beneficiary of your estate.

It is your choice where your money goes when you die.  Be sure to make the right choice.

Choosing your RRSP beneficiary

For many Canadians, RRSP assets might be the largest tax liability we own.

Upon your death, the market value of your RRSP can be tax as earned income on your final tax return.

However, the CRA allows you to designate a beneficiary who will receive the proceeds upon the death of the plan-holder.  Who you name as your RRSP beneficiary is very important. 

Depending on the value, RRSP holdings can easily be taxed at over $100,000 (40% or more of your plan) unless you name a “qualified beneficiary.” 

You can name your beneficiary directly on your RRSP application (the easiest way) or you can make the designation in your will.

Qualified beneficiaries

Taxes can be deferred by naming your spouse (by marriage or common law) or your financially dependent children or grandchildren as qualified beneficiaries.

  • Spouse: In most cases this is the easiest solution.  The RRSP is included on the terminal tax return but there will also be an offsetting deduction for the same amount, so no tax is paid on the rollover.  The actual transfer must be made before December 31 of the year following the death of the planholder.  This way your spouse can maintain the tax-deferred growth and will only pay tax on eventual withdrawals.from the plan.
  • Dependent Children: The child must be financially dependent on you at the time of your death and either a minor or mentally or physically infirm.  In the case of a minor child who is not infirm, a term annuity must be purchased with the plan assets that will make payments each year until the child reaches age 18. For a child who is infirm, the proceeds can be transferred on a tax-free basis to his or her own RRSP or can be used to buy an annuity.  In both cases, taxes are paid on the payments or withdrawals made.
Other beneficiaries
  • Adult child, other relative, or friend: No tax-deferred options are available if your children are adults and not infirm, even if they are financially dependent on you.  The entire RRSP proceeds will go to the beneficiary. The tax liability on the full proceeds will go to the estate, which will likely leave less money than you intended for your other beneficiaries so this must be carefully considered.
  • Charity: You can name a registered charity as your RRSP beneficiary.  The final tax return will be entitled to receive a donation credit for the entire value donated.  This could offset the tax owing.
  • Estate (or no beneficiary named):  The RRSP assets will be added to the estate and subject to probate fees. Taxes will be paid on the final return for the value of the RRSP. 

When you convert your RRSP to a RRIF it becomes a separate plan, so you need to make sure you name a beneficiary again.

If you name your spouse as a “successor annuitant,” he or she will simply take over the RRIF payments – with no paperwork to deal with.  If your spouse is simply named as a beneficiary, the RRIF will be collapsed and investments sold, and the monies can be rolled over into their RRSP or RRIF.

Other beneficiary options are the same as for a RRSP.

(Note: In Quebec, it is generally not possible to name beneficiaries on RRSP or RRIF applications.   This means the assets will flow through to the estate.)

Choosing TFSA beneficiaries

There are no “qualified beneficiaries” for a TFSA.  You can choose whoever you want.  However, it’s advantageous to name your spouse as “successor holder” rather than “beneficiary.”  That way they can simply take over the account and become the new owner – and even combine it with their own TFSA.  It doesn’t affect contribution room.

Other beneficiaries will receive the market value of the deceased’s TFSA account tax free.  However, any income earned after the date of death is taxable income to the beneficiary.  Beneficiaries can contribute the proceeds to their own TFSA subject to their unused contribution room.

If no beneficiary is named, or you name the estate, the proceeds will be added to your estate and will possibly increase the probate fees.

RELATED:  Estate Planning Options for Your TFSA

Choosing non-registered accounts beneficiaries

Some spouses ensure all their accounts (chequing, savings, GICs) are joint with rights of survivorship.  In this case the assets simply turn over to the survivor.

Investments in non-registered accounts are deemed to be sold at the time of death and any capital gains will be taxed on the final tax return.  The assets flow to the estate and then to the beneficiaries named in your will.

One exception, under the CRA spousal rollover rules, all investment assets can be transferred to your spouse with no immediate tax consequences.

Choosing annuity beneficiaries

If your annuity is a term annuity and you name your spouse as the successor annuitant, they will begin to receive the remaining payments at your death.

If your property is registered in joint tenancy with right of survivorship (meaning both spouses are equal owners) on the death of your spouse, you automatically assume full ownership of the property. This will reduce probate fees.

Term annuities and other types insurance contracts such as segregated funds permit you to name a spouse, a child, or any other individual as beneficiary.  All proceeds are paid tax free and, in addition, there are no probate fees charged.

The bottom line

Naming your beneficiaries is a very important part of tax and estate planning and there’s a lot to consider.  In most cases the funds will transfer directly to the beneficiaries.   The assets will not form part of the estate, reducing probate fees. which may result in significant savings.

Ensure your choices are aligned to your will.

Finally, review your beneficiary designations whenever there is a change in your personal circumstances.

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