Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts

Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts

The following is a sponsored post by Sun Life Financial, all thoughts and opinions are my own.

It has been said there are two certainties in life – death and taxes.  At least you can do something about the latter to help your spouse, your partner, your family and/or your estate.  This post will tell you how when it comes to general guidance associated with naming beneficiaries for key investment accounts.

Don’t forget the fine print!

My wife and I have been diligent to save and invest in a few investment accounts over the years.  First and foremost, we strive to max out contributions to our TFSA (Tax-Free Savings Accounts) every year – investing in Canadian dividend paying stocks – although there are many other great things you can do with your TFSA.  We accomplished this goal again this year.

I’ve also worked hard to max out contributions to my RRSP (Registered Retirement Savings Plan) over the years, and my wife is closing in on maxing out her RRSP as well.

Maxing out our TFSAs and (eventually) both RRSPs will be a heady one-two early retirement investing punch.  Yet buried in the paperwork we filled out many moons ago when we opened these accounts was some very important wording about naming beneficiaries for these accounts.  Get those decisions right, and estate planning can be much easier.  Mess that up, and it could be a tax nightmare for your loved ones.

Let’s take a closer look at some common considerations to naming beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts.

Beneficiaries

RRSP beneficiaries

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

The main thing you need to know is, generally speaking, upon death the taxman treats the fair market value of your RRSP as income – subject to tax at your marginal tax rate.  Current CRA (Canada Revenue Agency) tax rules require that fair market value of the RRSP, as of the date of death, be included in the deceased’s final tax file submission.

Tax bills on the RRSP can be avoided, however, if you name certain beneficiaries.  To make things more complicated (CRA tends to do that…), not all beneficiaries are created equal.  Here are some things to think about, since qualified beneficiaries may be able to receive RRSP funds without anyone paying tax upon your death.

RRSP qualified beneficiaries

  1. A spouse or common-law partner

There is a spouse rollover provision that allows a spouse, who if listed as the beneficiary, gets to put the deceased’s RRSP assets into their own RRSP without any immediate tax consequences.  For what it’s worth, this is what my wife and I have established for our RRSPs.  This way, either one of us can use this rolled over money and maintain tax-deferred growth inside an RRSP account until monies are ultimately withdrawn.

I suppose a spouse or common-law partner can also choose to take the RRSP assets as cash but in that scenario, RRSP proceeds are taxed in either the hands of the surviving spouse in the year of death OR the estate of the deceased will account for the value of the RRSP in the final income tax filing and will need to pay any resulting taxes.

  1. A financially dependent child or grandchild

Canadians may wish to consider another option.  An RRSP owner can designate their financially dependent child or grandchild as their RRSP beneficiary.  From there, depending upon the child’s age and nature of the dependency, a host of other options can potentially occur, including:

  • Transfer the money to their RRSP (or even a RRIF – Registered Retirement Income Fund).
  • Purchase an annuity until age 18 – while no tax is payable immediately at time of death, annuity payments are 100% taxable to the child.
  • Rollover assets into a Registered Disability Savings Plan (RDSP).

Other RRSP beneficiary options?

You can always consider naming a charity as an RRSP beneficiary.  The RRSP account holder can send some or all of their RRSP assets to charities after death.  If that choice is made, the value of the RRSP assets is included in the final income of the deceased and taxes apply.  The benefit (pardon the pun) of this approach is the charitable donation will quality for a donation tax credit up to 100% of the RRSP assets donated – pretty much negating any taxes due.

The takeaway?

Consider naming a beneficiary other than adult children.  Why?  If no proper beneficiary is named (i.e., you have no spouse and only have non-dependent adult children to name) OR if the estate is listed as the beneficiary, then the RRSP assets will simply be added to the estate or given to non-dependent adult children beneficiaries, included in the deceased’s income as a deemed disposition of the deceased – and the estate will be responsible for paying the taxes owing.  While simple, letting RRSP assets go to the estate increases the value of the estate and more probate or administration fees will apply to settle it. Adult children should be aware of this and so should the RRSP owner!

Bottom line is that RRSP assets can be transferred directly to the beneficiaries you designate (in the RRSP account documentation) when completing the application. Whatever option investors choose ensure that choice is directly aligned to wills or an overall estate plan.

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

RRIF beneficiaries

As you probably know based on the titles of these plans, RRSPs and RRIFs are similar in that you can keep assets inside these accounts for tax-deferred growth.  The major thing to be mindful of is that RRSPs must be collapsed by the end of the year you turn age 71.  You don’t have to turn your RRSP into a RRIF in your early 70s: you can convert it to an annuity as another option, or you can do both; it does not have to be a RRIF-or-annuity decision.

You know from the RRSP beneficiary options above that having RRSP assets tied up with the estate can be costly.  This is why many advisors suggest investors consider treating your beneficiaries for RRIFs like beneficiaries for RRSPs.  Upon death, your RRIF will be collapsed and the investments sold.  As the beneficiary, the surviving spouse can have the money from your RRIF rolled over to their RRSP or RRIF.

A difference between RRIFs and RRSPs is that for a RRIF, a spouse or common-law partner can be named as a “successor annuitant”. In that fine print, following the death of the RRIF holder, the account stays open and the spouse becomes the new owner and will continue to receive the RRIF payments.

When we establish our RRIFs this is what my wife and I intend to do: name each other as a “successor annuitant”.  In doing so, there will no need for my wife (or I) to collapse the RRIF, no paperwork to deal with, and in the case of my wife she will simply take over RRIF payments from me.

If for whatever reason your spouse is not a “successor annuitant” but the RRIF beneficiary, the RRIF will be collapsed in the name of the deceased; investments are sold. Then as the beneficiary the surviving spouse or common-law partner can have monies rolled over to their RRSP or RRIF.

What if you don’t name a RRIF beneficiary?

You’ve seen this drill before:  your RRIF will be included in the calculation of probate fees on your estate. The value of your RRIF will also be included as income on your final tax return. That means the beneficiaries of your estate may get less money, after all income taxes and probate fees are paid.

Other RRIF beneficiary options?                             

Like the RRSP selection, if you name a charity as the beneficiary of your RRIF then your estate may receive a charitable donation tax credit up to 100% of the RRIF income report on the deceased’s final income tax return.  This can help offset any tax owning on the proceeds delivered by the RRIF.  It can also be a great option if seniors don’t have a spouse, their adult children are well-established, and folks want to send money to their favorite charity that would have otherwise gone back to government pockets.

Are there any tax implications to naming adult children as RRIF beneficiaries?

Yes there are!   If a RRIF beneficiary is not a spouse or common-law partner – or a financially dependent child or grandchild – then the entire value of the RRIF will be subject to tax.

Just be mindful that without a RRIF beneficiary, probate costs might be higher since someone has to manage your estate and in addition to that, court fees are typically based on a percentage of the value of your RRIF.

TFSA beneficiaries

This account is stellar, I mean, tax-free growth and income from this account in retirement?!  Almost seems like it’s too good to be true!

Basically, you can choose whoever you want as your TFSA beneficiary and in our case, I named my wife.  As a TFSA account holder, though, I actually named my wife a “successor holder” not a “beneficiary” – there is a difference.

TFSA success holder

This designation can only be used for a spouse or common-law partner. Similar to the RRIF “successor annuitant”, this holder of a TFSA simply takes over the account and becomes the new owner as the name suggests.  Here are the benefits of this approach.

As a TFSA successor holder:

  • the deceased’s TFSA value is not included in their date of death/final income tax return;
  • the successor holder will become the new holder of the TFSA immediately upon the deceased’s death;
  • the successor holder will receive your TFSA assets, i.e. all earned income/assets up to the date of death sheltered within a TFSA account;
  • all of the earned income after the date of death will remain sheltered within the TFSA (a HUGE benefit);
  • after taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of the deceased’s TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
  • after taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

TFSA beneficiary

If someone other than a spouse or common-law partner is to inherit your TFSA, that person would typically be referred to as “beneficiary.”  What you need to know in this case is:  the account must be collapsed, and the value at time of death will go to the named beneficiary.  This is how it plays out.

As a TFSA beneficiary:

  • the beneficiary will receive the fair market value of the deceased’s TFSA account free of any income taxes;
  • all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer to the beneficiary is taxable income and must be included in the beneficiary’s income tax return (a major drawback for spouses and common-law partners compared to the option above);
  • beneficiaries can contribute a portion or all of the deceased’s TFSA assets up to the limit of their own unused TFSA contribution room; and
  • if no beneficiary or successor holder is designated in the TFSA documents or in the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.

Now, your spouse or common-law partner can also be a beneficiary but this has some draw backs to “successor holder”.  As a TFSA beneficiary they can transfer the value of your plan on the date of your death (before December 31 in the year of your death) without requiring contribution room but there is paperwork involved.  In dealing with the aftermath of your death, your survivor must designate this “exempt contribution” on a CRA RC240 form (Designation of an Exempt Contribution Tax-Free Savings Account (TFSA)), and file the form with the CRA within 30 days of the contribution.  For the survivor to obtain an exempt contribution, the amount must be received and contributed to their TFSA during the rollover period.  Exempt contributions cannot exceed fair market value of the deceased’s TFSA. So, amounts earned in your TFSA after death, but before distribution to your survivor, would require TFSA contribution room for future tax sheltering – basically it’s very complicated with CRA.  Best to do any transfer as quickly as possible to reduce taxation.

What if you don’t name a TFSA beneficiary?

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

For our situation, I think we made the right choice for TFSA “successor holder” status.  While naming my spouse as a TFSA beneficiary would be fine I guess, I don’t want her to go through any more hassles than necessary after I am gone.

Non-registered account beneficiaries

Simply put, when you die with assets in a non-registered account, there is a deemed disposition of all your assets at their fair market value.  Essentially, your investments are cashed out in the eyes of the CRA – whether they’ve been sold or not – and applicable taxes are determined.

Cash in savings accounts and guaranteed investment certificates (GICs) are taxable, related to the interest earnings accrued for the year – and that can flow through to the estate and then to beneficiaries.

Stocks, like the Canadian dividend paying stocks that I own, may be subject to capital gains.  The good news is, these stocks receive more favourable tax treatment than those assets earning just interest.   You can read more about the Canadian dividend tax credit from my site here.

If my taxable assets drop considerably in value, I could also have a capital loss as well; such losses could at the time of my death offset taxes owing on capital gains inside this account.   To the best of my knowledge, savings accounts, GIC’s, and Canada Savings Bonds do not permit beneficiary designations.  At the time of my death, all my non-registered stock proceeds will go into the estate and terms and conditions of my will shall play out.  (My will already states what to do with my investments and assets that I don’t jointly share with my wife.)

Annuities and Life Insurance Policies

You can absolutely name a spouse, a child or other individuals as beneficiaries under these types of contracts. All proceeds are paid tax-free to the beneficiary and, in addition, there are no probate fees charged to these assets.

All insurance products permit beneficiary designations.  Sun Life also has accumulation annuities (or insurance GICs) and there are also segregated fund contracts as an alternative to mutual funds.  All investors are best advised to understand the products they are investing in before they buy them – do you own due diligence.

Summary

Needless to say there is a lot to consider when it comes to naming beneficiaries and estate planning.  I’m really just scratching the surface here since I did not tackle all accounts or possibilities, let alone some provincial nuances (i.e., rules in Quebec). I do hope though this post offered some perspectives and guidance to consider for your situation.

I want to thank my partner, Sun Life Financial, for assisting with this post so that you can dive deeper and make some sound, educated choices when it comes to naming beneficiaries for your TFSAs, RRSPs, RRIFs and other key accounts. You can learn more and plan more by checking out their resource page here.

My Own Advisor is not a tax professional and this information is not tax advice, however, I do my best to ensure information on my site is accurate and relevant as much as I can.  Thanks for being a fan.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

34 Responses to "Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts"

  1. Great post Mark! Very detailed!

    It’s so important when you have investments in multiple account types at multiple financial institutions to double check the beneficiary and successor holder designations. Sometimes they can be hard to keep up with if people spread their accounts over many places.

    Reply
  2. Hi Mark, thank you for your useful comments. In my case, I have some money in my RIFF and some in my TFSA. I have a will where my two adult children are named to inherit whatever money or assets I have after my death. In this case, should I need to name them beneficiaries?
    Thank you very much.
    CS

    Reply
    1. I can’t offer that advice Carmen for many reasons but hopefully this post helped you make a more informed decision tax-wise; how your loved ones would need to handle the RRIF and TFSA.

      Reply
  3. Hey Mark

    I’m not sure if I’m understanding your comment on a non-reg account correctly but if you’re saying there’s no way to roll it over to your spouse without triggering taxes, then it’s different that what I’ve seen. My understanding is that you can specify in your will to just transfer it and have your spouse assume the original ACB.

    We currently just have a will we did without a lawyer and I cam meaning to get it re-done so I’m not 100% sure on this. This may be the final motivation to go get it re-done.

    I’ve seen it in a few places and here’s a link to one of them.

    https://www.assante.com/advisors/fmalinka/documents/TEP-EP-Death%20and%20Taxes.pdf

    Ciao
    Don

    Reply
    1. My understanding is a Will can specify how to manage the non-reg. account (i.e., to spouse) but it cannot escape taxation to the spouse based on your ACB.

      The general rule for non-registered assets is that a taxpayer is deemed to have disposed of all his or her property immediately upon death at their fair market value (FMV).

      When the FMV exceeds the property’s adjusted cost base (ACB), the result is a capital gain. That must be reported in the deceased’s final tax return.
      To defer this deemed disposition upon death – have a Will that transfers the property to the deceased’s spouse or partner, where applicable. When property is transferred in this way, the transfer can be done without triggering any immediate capital gains and the associated tax liability can be deferred until the death of the second spouse or partner (or until that spouse or partner sells the property, if earlier.)

      Again, not a tax pro but that is my understanding. 🙂

      Reply
    1. I can’t offer expert advice here Ann for many reasons but I think it would make sense to ensure your Will is aligned to your beneficiary designations to avoid complications.

      Here is an article I read, at least about Ontario Probate:
      https://ontario-probate.ca/beneficiary-designations-be-very-careful/

      Also:
      http://www.fillmoreriley.com/latest-news/article/98/beneficiary-designations

      “The general rule is that a will speaks from the date of death, but this rule is modified when dealing with designations of plan proceeds in the will. A designation or revocation made in a will is effective from the date of the will, not death. This means that a general clause in a will leaving “all RRSPs or RRIFs” to a named person is effective as to only those plans in existence at the time the will is executed. If additional RRSPs are subsequently acquired, and the purchaser wishes to have the person originally named in the will as the beneficiary, he should do one of the following: (1) name that same person as beneficiary with the institution on their designation form; (2) re-execute the will or prepare a codicil to have a current date (e.g. after the new RRSP is purchased); or (3) make no designation when the new RRSPs are purchased and assume that if there is no inconsistent designation, the designation in the will may apply to the after acquired RRSP. The most prudent course of action would be to follow option (1) or (2) above.”

      “The Act allows a designation to be made by will or by an instrument signed by the participant. When made by instrument, the instrument is usually a form at the institution where the plan is maintained and is signed by the participant without witnesses or other formality. When made in a will, the designation must refer to the plan either generally (“all my RRSPs”) or specifically (“my RRSP bearing plan no. 34437 at the Bank of Manitoba”).”

      “The Act allows revocations to be made by instrument or by will. When done by will, a revocation of an instrument is only effective if the revocation relates “expressly to the designation, either generally or specifically”.

      Reply
  4. Hello Mark,

    Thanks for this very well detailed and informative post.
    I was very interested by the difference between “successor holder” and “beneficiary” in the case of TFSA.
    I will take the necessary steps to get it registered for my various TFSA accounts to protect my wife.

    Reply
    1. Thanks Jean-Paul. Again, I’m not a tax or estate planning pro but I believe there is a major difference between the two for the TFSA and best ensure you have the appropriate paperwork signed and on file with your brokerage.

      Reply
    2. I believe only your spouse can be successor, not anybody else, not even your kids.

      The successor of your TFSA just get your entire TFSA as his/her TFSA, and continue to enjoy tax free growth/income. The beneficiary get your TFSA without paying tax. But he can not contribute that money to his TFSA unless he has enough contribution space.

      Reply
      1. Depends on the province. I know Quebec has various “rules”! Personally, I believe the “success holder” designation for the TFSA makes the most sense for spouses.

        Reply
        1. CRA “deems” all investments sold in order to calculate tax owed. As long as the Executor calculated the market value of investments and pays the tax owed, the balance of the investments (assuming some are sold to pay the tax) can remain “In Kind” and transferred at the market value to whoever specified in the will. I also assume the broker will transfer the shares In Kind as instructed by the Executor.

          Reply
          1. Thanks cannew and yes, re: CRA. The good news is some of these calculations are not involved when you select certain designations (i.e., “successor annuitant”).

    3. Hello again Mark,

      I checked with the Government of Quebec and the rules are totally different than the other provinces (what’s new !) regarding TFSA:
      If you designated your spouse in your will, he/she will be able to transfer the total amount of your TFSA in his/her TFSA without any impact on the amounts he/she can still accumulate and without any taxes.
      If you did not designated him/her in your will and you have more than one heir, your TFSA will cease to exist and everyone will receive his/her part according to your will and they can transfer it to their TFSA but it will count as another deposit from their allowed annual amount.
      I hope this is clear enough for Quebec only!

      Reply
      1. Yes, Quebec has different rules and without making my post about 3,500 words (!) I didn’t get into those those. You are correct from my understanding as well:

        In Quebec re: TFSA, put your spouse in your Will and he/she can get the total amount of the TFSA without any complications. Otherwise, no Will in Quebec, gets more messy as part of the estate and deemed dispositions.

        Reply
  5. Another good post Mark! Thank you. I’ll be calling Investorline to confirm my wife and I are listed as “Successor annuitant” and not “Beneficiary” as beneficiaries.

    Reply
    1. Let me know how it goes Paul. Good on you to confirm this with your brokerage. I did the same a few weeks ago when I started drafting this post – so this was partially a case study 🙂

      Reply
    1. Hi Charles,

      I’m not a tax pro but this is my understanding. You can confirm with a tax pro, lawyer or another professional.

      When you die, for non-registered assets, from a tax perspective you have a ‘deemed disposition.’ This means you’ve sold them at their fair market value, so you could trigger a capital gain or a capital loss. If the spouse is a joint owner of an asset, then ownership would be passed on automatically at time of death, and the assets would be deemed to have been sold at their adjusted cost base.

      Reply
      1. Thanks Mark for your quick response !
        Now I am totally confused based on your responses to my question and others……..
        OK…..let me re-phrase my question :

        Let’s say I have 100 shares of a Company in a non-resgistered joint account with my Spouse.
        In my Will, I have spelled out clearly that all my assets be transferred to my Spouse upon my death.

        Based on the above, what happens to the 100 shares after I die ?
        1) Does my wife now own the 100 shares, as is ? OR
        2) Do the 100 shares have be sold at FMV and all proceeds will be transferred to my Spouse ?
        And if the FMV is greater than ACB, any capital gains will be included in my final Income Tax Return ?

        Your advise is greatly appreciated. Thanks.

        Charles

        Reply
        1. RBull (59, retired, married, rural coastal NS) · Edit

          “deemed disposition” = equivalent to having been sold for tax purpose (not actually sold).

          1) yes your wife owns the 100 shares after you die with a JTWROS acct.
          2) No, No, Yes

          My understanding is a spouse that dies with a JTWROS acct will have their share of capital gains or losses reported on their final terminal tax return, and the assets of the deceased (equity shares) will have a readjusted ACB at FMV for the surviving spouse.

          Reply
        2. Hey Charles,

          My understanding is, with a joint non-reg. account…yes, your wife will own the 100 shares as-is.

          No, she does not have to sell them (but obviously she can if she wishes). Because it is joint, I believe any ‘deemed disposition’ where the FMV is > than ACB will have capital gains (or less will have a capital loss) and that is reported on your final (terminal) tax return. Given it is a joint account, my understanding is 50% of the capital gain is taxable to the deceased (you in this case) and must be reported.

          The ACB for your spouse goes forward from there!

          I could be wrong on this, but even with a joint non-reg. account I don’t think the shares simply rollover to your spouse with any tax consequences.

          Reply
  6. Excellent post. In my line of work, a lot of people don’t know the difference between beneficiary and successor holder for TFSA (I didn’t at first either! whoops!) so this is a great post for me to refer to the clients. Thanks for the detailed post!

    Reply
    1. I definitely think so Christina. I can appreciate not everyone has the same situation and so from an amateur (me) to you, I would encourage you to write down your scenarios and questions for tax pro or lawyer to discuss what is best for your financial situation. Thanks for being a fan.

      Reply
    1. I think another important takeaway, from my article at least, is to where possible ensure your Will aligns with your beneficiary designations for investments. Just makes life easier for all involved after you are gone.

      Reply
  7. RBull (59, retired, married, rural coastal NS) · Edit

    This is a very useful partner message. Lots of valuable information and it should help prompt further dialogue and thought for everyone not having all of these items properly dealt already.

    Reply

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