When the annuitant of a RRIF or RRSP dies the fair market value of the RRIF or RRSP right before death is included on their final tax return, unless there is a spouse or dependent minor who can take over the account tax-free.
There is often a time delay between the death of the annuitant and ultimate sale of the assets in the RRIF or RRSP. If there has been a decline in market value in the meantime, the tax bill could eat away a larger portion of the proceeds.
A person dies holding $150,000 worth of shares of XYZ Co. inside their RRIF. Six months later, when the shares are paid out, the fair market value had fallen 33% to $100,000.
Prior to 2009, this situation would have seen the full $150,000 included on the deceased’s income tax return despite the fact the estate only received $100,000. If the $150,000 were taxed at a marginal rate of 45%, the tax bill would have been $67,500 on proceeds of $100,000 ultimately received.
RRIF & RRSP Losses Following Death Allowed
To address this issue the federal government announced changes that allow the post-death decrease in market value in an RRSP or RRIF to be deducted from the value of the RRSP and RRIF at the time of death.
In the above example, the decrease in market value of $50,000 would be deducted and the tax bill reduced by $22,500 to $45,000.
The rule is in effect from January 2009 forward. And generally, this rule applies if the final distribution from the estate is made before the end of the year following the year of death but the CRA will evaluate and waive this condition on a case-by-case basis.