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. I’ll update or link to other content on my site as I expand this information…

Beneficiaries for TFSAs, RRSPs, RRIFs and other key 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. 

Great things you can do with your TFSA

We’ve also worked hard to max out contributions to my RRSP (Registered Retirement Savings Plan) over the years. Just a reminder about the RRSP-generated tax refund.

If you spend that RRSP refund then TFSA makes more sense

Maxing out our TFSAs and RRSPs, in that order, will be a heady 1-2 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 for TFSAs, RRSPs, RRIFs and other key accounts overview

1. RRSP beneficiaries

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:

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.

2. 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.

Should you name adult children as RRSP beneficiaries?

Humm, that depends. 

Consider this: if the estate is listed as the beneficiary, then the RRSP assets will simply be added to the estate, included in the deceased’s income as a deemed disposition – 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 but probate shouldn’t be feared. 

That could be better than RRSP assets going to adult children, since CRA can go after the executor, or the beneficiaries, for the estate tax bill. Personally, if you’re the last to die, I think you name the estate as the beneficiary to avoid this problem and ensure the estate has money to pay the tax bill.

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.)

2. 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.

Is there taxation when it comes to remaining RRIF assets?

Yes.

It could be a lot.

When a taxpayer dies, they are deemed to have disposed of their assets on their date of death. This includes a registered retirement income fund (RRIF). The fair market value of their RRIF is generally reported on a T4RIF slip and added to their income on their final tax return for the year of death. 

Tax payable on a RRIF can be significant. Depending on the province or territory and the other sources of income for the deceased, more than 50% tax may ultimately be payable on the RRIF value. 

Visit one of my favourite sites Taxtips.ca for more details. 

The takeaway when it comes to RRIF beneficiaries?

Consider winding down your RRSP/RRIF assets before your 80s and definitely by your 90s.

Generally RRIFs are subject to two types of taxes at death:

1. income tax
2. probate fees.

As a general rule, where there is no surviving spouse, any capital remaining in a RRIF at the death of the owner is included as income in the deceased’s tax return for that year. For example, if your income from other sources was $50,000 but the value of your RRIF at death was $200,000, your estate would be required to pay income tax on $250,000.

Therefore, some RRIFs could end up being taxed at 50%, or more, when the owner dies.

How to avoid this?

Consider leaving TFSA assets “until the end” and spend all your RRSP/RRIF assets earlier in life. 

Read on!

3. 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.

The successor holder 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.

My suggestion is to consider TFSA “successor holder” status where that makes sense for your personal/relationship status. The successor holder, after taking over ownership of the deceased holder’s TFSA, can make tax-free withdrawals from that account. The successor holder can also make new contributions to that account, depending on their own unused TFSA contribution room.

4. Non-registered account beneficiaries

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, if I’m the last to go, all my/our non-registered stock proceeds will go to the estate. The terms and conditions of our Will play out from there.

Annuities and Life Insurance Policies

You can absolutely name a spouse, a child or other individuals as beneficiaries under these types of contracts with insurance providers. 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 in particular also has accumulation annuities (or insurance GICs) and there are also segregated fund contracts as an alternative to mutual funds. I believe all investors are best advised to understand the products they are investing in before they buy them – do you own due diligence.

Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts summary

Needless to say there is a lot to consider when it comes to naming beneficiaries for TFSAs, RRSPs, RRIFs in particular. 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.

Portfolio draw down orders to optimize for beneficiaries – TFSAs, RRSPs, RRIFs and other key accounts summary

I think when it comes to our personal portfolio draw down options and estate planning preferences, we are very likely to proceed with the following draw down order(s) to avoid huge taxation issues/liabilities with our RRSPs/RRIFs in particular:

1. NRT = Non-registered (N), RRSPs/RRIFs (R), TFSAs (T)

OR

2. RNT = RRSPs/RRIFs (R), Non-registered (N), TFSAs (T)

Either sequence works well if one or more of these conditions apply:

• You have a modest taxable account value to help fund some living expenses. 
• You have modest RRSP/RRIFs accounts to draw down over time.
• You may have a workplace pension or pensions to draw from in retirement.  
• You desire to “smooth out taxation” over time. 
• You want to avoid drawing down your TFSA, early in life, therefore you can keep those TFSA assets compounding away tax-free over time to be estate-smart. 
• You are considering deferring Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits (or both!) to gain maximum inflation-fighting power from these government benefits. 

More reading: 

When to take your CPP benefit

RRSP withdrawal strategies before age 71.

What is OAS and how to avoid OAS clawback?

Of course beyond these drawdown orders there can be a myriad of drawdown tactics that can be used to balance short-term and long-term tax efficiency needs, optimize retirement income, let alone fulfill any wealth transfer desires:

• Blended withdrawals / a mix of income withdrawals from many accounts to be strategic with taxation.
• Custom withdrawals – based on tax bracket management in the “go-go” retirement years vs. “slow-go” years – which includes some strategic RRSP withdrawals when other income streams are in play, such as corporations or part-time work. 

My portfolio drawdown order?

I’ll might adjust my order over time but I wrote about my potential portfolio drawdown order here.

Some of the key advantages of my drawdown order is it will:

1. Put less stress on my personal assets when I am older,
2. It will provide built-in inflation-fighting power, and
3. It will also be very tax-efficient.

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. 

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.

Footnotes to this post: