Taxation: RRSP & RRIF & TFSA (16:XIII)
|This information applies to British Columbia, Canada. Last reviewed for legal accuracy by the Law Students' Legal Advice Program on June 30, 2023.|
A. RRSP: Registered Retirement Savings Plan
In British Columbia, a person may by will gift a property which they are entitled at law or in equity at the time of their death. This means that the proceeds from a deceased’s Registered Retirement Saving Plan (“RRSP”) can be distributed to the beneficiary outside of the will if a valid beneficiary designation has been made. However, please note that the deceased’s estate will likely need to pay taxes on the value of the RRSP as at the deceased’s date of death. This will be taxed as the deceased’s income for that year.
A person is “deemed” to have disposed of all assets at the moment before death and is accordingly taxed in the year of death as such. For example, if the deceased owns a rental property, then that rental property is considered to be sold at the moment of the deceased’s death and as a result, the deceased may have earned capital gains from this deemed disposition. Taxes will then be paid on these capital gains.
Additionally, the value of any RRSP or RRIF will also be considered to have been earned in the year of death. This is significant because the inclusion of all these capital gains will most likely bump the deceased to the highest tax bracket. In B.C., this bump could mean that an individual is taxed close to 50% of the income.
The major exception to this rule is the “spousal rollover” rule in section 73 of the Income Tax Act (“ITA”). This rule effectively defers payment of taxes owing from the deemed disposition if the asset is given to the spouse of the deceased until the death of the spouse.
If a beneficiary has been designated to receive the proceeds of a RRSP, those proceeds will pass directly to the beneficiary. However, the deceased will be considered to have earned the entire value of the RRSP during their year of death and the estate must declare the value of the RRSP on the T1 Terminal Tax return. Accordingly, unless a roll-over provision, such as the spousal roll-over, applies, the estate will be liable to pay taxes on the value of the RRSP.
If the estate is unable to pay the taxes, the beneficiary receiving the proceeds will be liable to pay the taxes owing (s 160.2(1) of the ITA provides that the estate and a designated beneficiary are jointly and severally liable for tax on the value of the RRSP at the date of death).
B. RRIF: Registered Retirement Income Fund
The same rules apply to RRIFs as they apply to RRSPs.
C. TFSA: Tax-Free Savings Account
TFSAs receive specialized treatment under the Income Tax Act. As TFSAs came into effect in 2009, this section of the chapter will not be material to the estate of deceased taxpayers who died in 2008 or earlier.
The fair market value of the TFSA will be received by the estate of the deceased taxpayer or any gains that accumulated in the account will continue to be tax-free until the end of the year following the death of the account holder. The tax-free status of the TFSA is preserved if the deceased taxpayer named their spouse or common-law partner as the successor account holder.
It is unlikely that there will be tax liability for the income generated by the TFSA from amounts contributed to the TFSA during the taxpayer’s lifetime. This is different from RRSPs or RRIFs.
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