RRIFs Part 2: What happens at end of life?

2019-04-30

In our previous post RRIFs Part 1: What are they?, we covered some RRIF basics. We said that while an RRSP is designed to receive contributions, a RRIF is designed to be used only for withdrawals, with very limited exceptions.

The most common exception is when a RRIF receives, aside from an RRSP rollover, a transfer of assets from the RRSP or RRIF of a deceased spouse or common-law partner. In general, when a RRIF holder dies, the value of the RRIF must be declared as income on the final tax filing of the deceased, unless the beneficiary is:

  • surviving spouse/common-law partner
  • financially dependent minor child or minor grandchild
  • financially dependent child or grandchild of any age who is infirm.

When the beneficiary falls into one of the above categories, he/she is considered “qualified” and, generally, can receive the RRIF assets without tax implication, but only if certain conditions are met. Some examples of conditions are:

  • the qualified beneficiary must be the sole RRIF beneficiary
  • the qualified sole beneficiary of a RRIF should be named in a legal will
  • the qualified sole beneficiary of a RRIF should be designated as such on the account

Most all asset transfers from a RRIF to a beneficiary will require that the RRIF value be reported as income on the deceased RRIF holder’s final tax filing and taxed accordingly. But if the beneficiary is qualified, taxes can be deferred, provided that deadlines to make these transfers are respected. As well, certain processes need to be followed to ensure the transfers remain tax sheltered. These deadlines are normally determined by the RRIF holder’s date of death and the necessary processes are dictated by government taxation guidelines.

Once the RRIF assets are received by the qualified beneficiary, the assets must be transferred to a tax-sheltered account like the beneficiary’s own RRSP or RRIF, eligible annuity, or term annuity to maximum age of 18, as the case applies. RRIF beneficiaries aged 18 to 71 are able to transfer the inherited RRIF to their own RRSP, and if aged over 71, to their own RRIF.

When a spouse is the intended inheritor, it may be important the spouse be named as the “successor annuitant” of the RRIF, rather than “beneficiary”. The process to transfer is far less complicated for the “successor annuitant” since it permits the surviving spouse to simply take over the receipt of the deceased’s RRIF payments.

There may be a delay between date of death and date of distribution to non-qualified beneficiaries resulting in an increase or decrease of value between these 2 dates. In general, increases would be taxed in the hands of the beneficiary while decreases in value can be reported on the deceased’s final tax filing. The date of distribution dictates the reporting options and process.

If no beneficiary is named and the deceased’s estate becomes the RRIF beneficiary, the RRIF is collapsed, and its liquidated value is included as income on the deceased’s final tax return and taxed accordingly – leaving only the after-tax value for distribution to heirs. Additionally, estates are potentially subject to creditor claims which puts RRIF proceeds at risk. For these reasons, it is extremely important that RRIF beneficiaries be named.

Very important to note is that if any of the estate’s beneficiaries are qualified and also beneficiaries for an amount equivalent to the RRIF value, there is a process to receive the same tax treatment as if they had been named. Awareness and execution of these processes can eliminate the tax treatment of the RRIF within the estate.

These are only key principles for RRIF account holders to keep in mind. Further subtleties, details, and considerations are best addressed by estate planners because the tax ramifications of this subject can be very complex and unpleasant for the surviving spouse and/or other beneficiaries. An Estate Planner’s input can help in decision-making and contribute to the correct construction of a legal will that executes intentions as was desired, with no unintended consequences.

Estate Planners are best qualified to help preserve a lifetime’s worth of savings and financial planning, including the potential for RRIF assets to remain tax-sheltered, remain invested, and potentially continue tax-sheltered growth so that the fruits of one life continue working to benefit the lives of others.