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Estate Tax Planning: RRSPs and Rollovers

Registered Retirement Savings Plans (RRSPs)

Like non-depreciable capital property and depreciable capital property, a spousal rollover is available for RRSPs. Money directly received by the spouse (as opposed to the estate of the taxpayer) by way of beneficiary designation is deemed to be income to the spouse and not the deceased. It is then possible for the taxpayer’s spouse to either include the proceeds of the RRSP in his or her income or, more likely, purchase an RRSP in his or her own name with the proceeds and thereby continue the tax deferral (ITA, s. 60(1)).

The surviving spouse should make sure to make the RRSP contribution in, or in respect of, the same year that the income is deemed to have been received by redemption. Supposing that the death occurs in November and redemption occurs in December, a spouse would like to make the contribution by February 28 in the next year. When the proceeds of an RRSP are receivable by an estate, the estate and the spouse may jointly elect that the amounts are deemed as received by the spouse, thereby allowing the tax deferral to be preserved (ITA, ss. 146(8.2)(b), 146(8.9), 146(8.91)).

For this joint election by the personal representative and the spouse to be prudent, the spouse’s beneficial interest in the estate must be sufficiently large so that it is fair to say that in the circumstances all payments can reasonably be allocated to the spouse.

For a child or grandchild of the deceased who is, as a matter of fact, financially dependant upon the deceased for support (ITA, ss. 146(1) “refund of premiums,” 146(8.8), and 146(8.9)), a different tax treatment is available to the extent that the proceeds of the RRSP are payable (either directly, or by way of joint election similar to the spousal joint election). In such a situation, the proceeds of the RRSP are included in the income of the child or grandchild recipient, who can purchase, if he or she is below the age of 18, an annuity payable until age 18 (ITA, s. 60(l). Should he or she be mentally or physically infirm, the deduction could be used for an RRSP contribution for the child or for the purchase of an RRSP annuity or RRIF.

While planning, extreme care should be taken by a taxpayer to find out how to gift the proceeds of an RRSP. The possibility that the RRSP could be having a value to the recipient, different from its face value, should also be considered by the taxpayer. Should the taxpayer’s death create a deemed income inclusion in the taxpayer’s terminal return, and the RRSP be expressly gifted to a particular person, there would be a joint and several liability for the amount of tax resulting from the deemed income inclusion between the recipient and the estate (ITA, s. 160.2(1)). The recipient should, and probably would, receive indemnity from the estate.

It is essential for a taxpayer planning a gift to understand to whom he or she would like to bequeath the tax liability. It could well be that the recipient of the RRSP would get the RRSP funds, while the estate (and the beneficiaries thereof) would bear the tax burden.  An administrator cannot apparently withhold payment for tax from the plan for this purpose following death (ITA, s. 153(1)(j); Income Tax Regulations, ss. 103(4), (6))

Don’t do anything before fully understanding your rights and obligations.  Contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario for all of your estate planning and personal or business tax law needs.