Talking about death is never easy, especially when the realization that someone you love is gone, and life will never be the same again.
By considering what’ll happen to your money and possessions now, you can make sure your loved ones are taken care of, and your wishes are clearly outlined before you pass on. This way, your family won’t have to make decisions about your estate during a time of grief and healing.
To help build this part of your financial plan, here are the basics of what happens to an RRSP after you pass away in Canada.
- Designating an RRSP beneficiary is key when estate planning (aka determining what’ll happen to your money and property when you pass away).
- When an RRSP is rolled into a qualifying survivor’s RRSP or RRIF, you won’t pay any tax on that money after filing your final tax return. The qualifying survivor pays tax when they withdraw the money.
- If you don’t designate a beneficiary, the money in your RRSP or RRIF will be withdrawn, and you will pay tax on it.
What happens to your RRSP when you die?
After you pass away, your RRSP counts as income on your final tax return. So even though you’re not here anymore, the government still collects taxes from your final tax return.
To avoid paying tax on your RRSP, designate a qualified beneficiary to inherit your RRSP. The funds can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) in the qualifying beneficiary’s name, and they’ll only pay tax when they withdraw the money.
If you leave your RRSP to any other beneficiary, the Canada Revenue Agency (CRA) taxes the total value of your RRSP on your final tax return before your remaining beneficiaries receive their inheritance.
Are RRSPs taxed after death?
Depending on the tax situation, an RRSP might be taxed after a death.
For instance, if your RRSP doesn’t have beneficiaries to transfer the funds to after you die, they get included as income and are taxed on your final tax return. On the other hand, if you name a qualifying survivor name the RRSP will be transferred to their RRSP or RRIF.
In that case, the money would only be taxed whenever your beneficiary withdraws from the RRSP.
Who gets your RRSP when you die?
You can designate a beneficiary for the RRSP and specify your inheritors in your will. The funds can also be distributed among multiple beneficiaries. You’re the boss.
An RRSP can be transferred in two ways:
- To a qualifying survivor who’s 71 years old or younger, such as:
- A spouse or common-law partner
- Financially dependent children or grandchildren
- To a non-qualified survivor, such as:
- Your estate
- Charity
- Non-related individual
- Financially independent children or grandchildren
Depending on who you choose (qualified vs. non-qualified survivor), the tax consequences will change.
If the beneficiary is a spouse, then they’ve got two choices—the money can go into an RRSP or to their life insurance company. In that case, the company must use it towards an eligible financial product within about a year after the spouse’s death.
Non-qualified beneficiaries get the money from your RRSP only after the CRA has taxed it. That money can then be used for anything—no need to keep it in an RRSP!
Do beneficiaries pay taxes on RRSPs?
Qualifying survivors can postpone paying taxes on an RRSP or RRIF they inherit as the amount they inherit gets rolled over into their account. They’ll only pay taxes on those funds when they use them, and the estate pays no taxes at all.
If they’re not qualified, the estate pays tax first, and then the beneficiary can do what they want with their inheritance as it’s tax-free.
How do taxes work for qualified and non-qualified survivors?
If you leave your RRSP to one of your financially independent children, a sibling, or even a charity, they’re all considered non-qualified beneficiaries. So the full amount of your RRSP will be taxed in your final return before the transfer.
Your inheritance, however, isn’t taxable to your child, sibling, or if you’re donating the funds from your RRSP. In that case, the charity will issue a donation receipt which can be claimed as a deduction against 100% of the income on your final tax return.
For example, let’s say your grandmother passed away and she wanted her RRSP to go to her favourite charity. If the RRSP was $125K when she died, that $125K will be reported on her final tax return as RRSP income—meaning the CRA will be knocking on the door with a tax bill.
Once the funds are transferred to your grandmother’s favourite charity, the charity will issue a tax receipt for the amount received. This can be claimed on her final tax return, allowing her to take advantage of the donation tax credit.
On the flip side, if you had a spouse designated as a beneficiary, they’d be considered a qualified survivor. When the RRSP gets transferred to their RRSP or RRIF, the money will only be taxed when your spouse withdraws it.
What is an RRSP rollover?
An RRSP rollover is a special transfer that happens after death. This means that the RRSP of the deceased person can be transferred into the RRSP or RRIF of their living beneficiary (as long as the beneficiary qualifies).
How do you roll over an RRSP after death?
To roll over an RRSP after death, you must complete the beneficiary designation form provided by your financial institution. This form allows the financial institution to transfer funds from the deceased’s RRSP into the qualifying survivor’s RRSP or RRIF.
The importance of designating a beneficiary
While everyone’s situation is different—taxes, like death, are inevitable.
In Canada, there’s no inheritance tax. This means your investments will be evaluated and measured at the time of your death. Depending on how you place your retirement funds, different situations can occur for how they’ll be treated for tax purposes.
That’s why planning your estate and finances can give you a peace of mind, knowing that your loved ones won’t have any financial situations relating to your RRSPs to sort out after your passing.
Take control of your investments with TurboTax
File on your own, with live help, or hand your taxes off to an expert.
Frequently Asked Questions
Yes, an RRSP can be transferred to a spouse or child upon death if they are a “qualifying survivor.” A qualifying survivor must be:
- 71 years old or younger
- Be a spouse, common-law partner, or financially-dependent child or grandchild
Yes, an RRSP can be left to a charity or non-qualified survivor. In the case of a charity, the RRSP funds are taxed in the estate and then donated. Then, the designated charity issues a donation receipt.
In the case of an individual, it depends on the will. The RRSP will be taxed in the estate and then distributed to non-qualified survivors according to the will. Inheritance isn’t taxed.
If you don’t name any beneficiaries for your RRSP, then the value of your RRSP will be taxed as income in your final return and any remaining amounts will then be paid out to your living spouse, children, or next of kin.
