One of the benefits of an RRSP or RRIF is the ability to directly name a beneficiary and avoid probate fees (also referred to as probate taxes) on death.
While the direct beneficiary designation feature is an efficient method of passing your retirement plans to your loved ones after you die, it does not avoid the income tax bill!
Probate fees and income taxes are different and some special planning should be considered when making a beneficiary designation on an RRSP or RRIF.
What Is Probate?
Probate is a process of confirming that your Will is valid and is your last Will and protects the executor from personal liability. Although there is no need for your executor to obtain probate and incur those fees, many times probate is required to change the ownership and distribute certain assets (stocks, bank accounts, and in some cases real estate).
If probate is obtained, the fee in most provinces is based on the value of your estate. With certain exceptions such as direct beneficiary designations on RRSP’s, RRIF’s, TFSA, insurance and assets registered in joint ownership.
What If There Is No Will?
When you die, your assets do not automatically pass to your heirs! If you do not have a Will, a family member may have to go to court and request to be appointed as the personal representative. Your estate will then be distributed according to the provincial law (which may not be what you expected!). Probate fees will be paid according to the court schedule for the province based on the value of your estate.
What Is Income Tax?
Income Tax, as its name suggests, is a tax on the income you receive. Income tax is calculated annually and is based on things such as employment income, business income, dividends, interest, and the net capital gains from investing.
When you die, you are deemed to have sold all of your investments at fair market value and any net capital gains and other income will be included on your final income tax return.
Comparing Probate & Income Tax
The following table compares and contrasts the difference between probate fees imposed by the court and income taxes due at death.
|Tax/Fee Applied To||Income To The |
Date of Death
|Value of Assets
At Date of Death
|Direct Named RRSP's Included||Yes, unless a |
spouse is beneficiary
|Direct Named RRIF's Included||Yes, unless a |
spouse is beneficiary
|RRIF Successor Annuitant||No.||No.|
RRSP & RRIF Beneficiaries
Notice in the table that certain assets, such as your RRSP’s, are not subject to probate but are still included in your final tax bill on death.
This can sometimes create a problem if the estate has no other assets to pay the estate debts and final taxes because the bulk of the estate was passed to your heirs via direct beneficiary designations or joint ownership.
Estate Planning Tips
If you have significant investments inside of RRSP’s, RRIF’s, in segregated funds or held in joint ownership, there a couple of things to consider:
- Name your spouse as the beneficiary. For income tax purposes, your spouse can receive the assets on a tax-deferred basis.
- Avoid bankrupting your estate. Leave enough in your estate to pay the final expenses and taxes. If you do not, the CRA will hold anyone ho has received a payments from your registered accounts and segregated funds liable for a portion of your final tax bill.
You Can’t Take It With You
If you want to find out more about estate planning tips and pitfalls, I’d suggest picking up a copy of The 50 Biggest Estate Planning Mistakes…and How to Avoid Them by Jean Blacklock and Sarah Kruger. The book outlines the major mistakes people make in estate planning and their consequences in an entertaining way-and then proceeds to tell you exactly how to avoid these mistakes. The book is available at chapters.indigo.ca.