Tax on RRSP/RRIF’s at Death – Does the Estate or RRSP/RRIF beneficiary pay?

Canadian Death & Taxes 101: Regardless if you have designated a beneficiary on your RRSP/RRIF, you are deemed to have received the balance of your RRSP/RRIF account remaining as of your date of death.  The fair market value of your RRSP/RRIF account is included in income on your Date of Death T1.  Depending on the amount of RRSP/RRIF at date of death, the income taxes payable relating directly to the RRSP/RRIF can be significant.

If your spouse or dependent child is a beneficiary, there is an opportunity to defer these taxes.  But that’s a topic for another day.

I am often asked who is responsible to pay the income taxes relating to the RRSP/RRIF – the Estate or the designated beneficiary of the RRSP/RRIF?

The Nitty Gritty: Generally, the Estate is liable to pay the deceased’s taxes which include those resulting from the RRSP/RRIF deemed receipt at death.  If an RRSP/RRIF has designated beneficiaries, the proceeds are paid directly to them but the taxes are still paid from the Estate.   If there are not enough assets in the Estate to cover the tax liability, then Canada Revenue Agency (CRA) will go after the RRSP/RRIF beneficiaries for payment.  CRA can hold the RRSP/RRIF beneficiaries liable for the deceased’s unpaid taxes up to the amount directly relating to the RRSP/RRIF they received.  The beneficiaries’ liability will be pro-rated for the share of the RRSP/RRIF received.  Here’s an example:

Alice has two adult children, Marie and Lynne.  Alice has a RRIF and Marie and Lynne are the designated beneficiaries.  Alice dies and the value of her RRIF at date of death is $50,000.  The only other asset Alice had was a chequing account with a balance of $4,000.  Alice’s Date of Death T1 taxes payable were $12,000, of which $10,000 were directly attributable to the RRIF deemed receipt at death.  Who is liable to pay what?

Value of RRIF at date of death $50,000
RRIF proceeds paid to Marie and Lynne as beneficiaries $25,000 each
Estate assets (funds in chequing account) $ 4,000
Less: Alice’s Date of Death T1 taxes payable $12,000
Taxes still owing to CRA $ 8,000

Since $10,000 of taxes can be directly attributed to the RRIF, CRA can hold Marie and Lynne liable for Alice’s unpaid taxes to a maximum of $5,000 each.  In this case, the unpaid tax debt is $8,000 so Marie and Lynne are responsible to pay $4,000 each.

In our experience, it can take several years for CRA to catch up with the beneficiaries.  By this time, the inheritance could already be spent, but the beneficiaries would still be liable to pay the amount owing (plus interest).  RRSP/RRIF beneficiaries may wish to confirm with the Estate Executor there are no unpaid taxes they might get stuck with later down the road.  The Executor should advise the beneficiaries as soon as possible if there are taxes relating to the RRSP/RRIF that the Estate does not have the funds to pay.

The example above shows how important it is to consider income taxes when Estate planning, even for relatively small Estates.  When you are giving different assets to different people, you should consult with a professional to make sure you don’t end up unintentionally favouring one beneficiary at the expense of another.  A tip to professionals: If you are unsure how income taxes will affect your client’s Estate, then you better call someone who is.

For more detailed information or if you have a specific situation you would like to discuss, go to our firm website to view our contact information.  You may also wish to refer to CRA’s RC4177 – Death of an RRSP Annuitant and CRA’s RC4178 – Death of a RRIF Annuitant.

Until next time,

Heather

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