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RRSP Beneficiary Rules Canada


One of the primary tools for retirement savings in Canada is the Registered Retirement Savings Plan (RRSP). It encourages saving for post-retirement and offers tax benefits to enhance these savings. 

With the concept of RRSP, people can save for their retirement on a tax-deferred basis. It means contributions to an RRSP reduces taxable income and the taxes on investment gains are deferred until the money is withdrawn. 

The amount that can be contributed to an RRSP is subject to annual limits. It is usually a percentage of the individual’s earned income from the previous year, up to a maximum limit set by the government.

While the primary purpose of an RRSP is for retirement savings, funds can be withdrawn before retirement under certain conditions, such as buying a first home or returning to school. However, these withdrawals can have tax implications.

At Onyx Law Group, we have a diverse team of lawyers, well-versed in the art of estate litigation and family law. Our goal is to represent our clients in legal proceedings and ensure that they have a smooth and fair process. We’ve been in the industry for years and our client reviews speak for us. Reach out to us now to enjoy ease in family and estate law proceedings!

Beneficiary Designations

I have seen many problems for loved ones when a person dies before they have a chance to update their beneficiary designations, including unintended tax consequences. I will describe the tax consequences more below. Your estate planning is more than just drafting and signing your Will. You must look at all your assets and analyze how they are legally held and understand how certain assets will be automatically distributed outside your estate when you die. Assets that have a named beneficiary do not form part of your estate and, as such, are not distributed according to your Will. 

If you hold a life insurance policy (individually or with your employer’s group plan), registered accounts (RRSP, RRIF, TFSA) or segregated funds, then you should have filled in forms letting the financial institution know who to send the funds to when you die. You may pick a person, a charity or name your estate. If you choose a person, sometimes the financial institution also allows you to pick an alternate or contingent beneficiary(ies) in case the first person you choose dies before you. You may also choose more than one person and pick the portion that each person may have. Typically, you would name adult(s). Minor children should not be named directly on registered accounts but in most circumstances, you may name minor children on an insurance policy if you name a capable trustee for them. There are other ways to benefit minor children, but those strategies will not be discussed here. 

Beneficiary Designations

The cases I have come across involved people dying with a significant amount of group life insurance through their employer or an RRSP. In all the cases I have personally dealt with, when the deceased first filled out their forms with their employers or financial institution, that person did not yet have a spouse and/or children. Often, the single person designates a sibling, a parent or niece/nephew as the beneficiary(ies). The problem arises when that person unexpectedly dies after getting married and/or having children. They had intended for their new spouse and/or young children to benefit from these assets but because they neglected to turn their minds to their new family circumstances, others now get the benefit of those funds.  Occasionally the other family members have been known to renounce their benefit and give the surviving spouse the insurance or registered funds but unfortunately, this is rare. 

Importance of Designating Beneficiaries for RRSPs

Designating a beneficiary for an RRSP is a critical aspect of estate planning. It ensures that the assets in the RRSP are distributed according to the account holder’s wishes upon their death.

By naming a beneficiary directly on the RRSP, the assets can bypass the estate and probate process, potentially saving time and reducing fees.

The choice of beneficiary has significant tax implications, both for the estate and the beneficiary. Certain beneficiaries, like a spouse, can receive the RRSP proceeds more tax-efficiently than others.

Designating beneficiaries is also about providing for dependents or loved ones. It can be a way to ensure financial support for them after the account holder’s passing.

RRSP Beneficiary Rules Canada

RRSP Beneficiary Rules Canada

Some registered retirement savings plan beneficiary rules in Canada are: 

  •  If you name your spouse or common law partner as the beneficiary, the RRSP can be transferred to them tax-free upon your death. It means the assets in your RRSP can be rolled over to the spouse’s RRSP, Registered Retirement Income Fund (RRIF), or a qualifying annuity, without triggering immediate taxes.
  • You can name someone other than a spouse or common law partner as a beneficiary. It could be a child, a friend, or even a charity. However, the fair market value of the RRSP at the time of death is considered the income of the deceased for the year of death. It means it could be subject to income tax on the deceased’s final tax return.
  • If the beneficiaries are minor children or financially dependent children or grandchildren, there are special provisions. The RRSP can be used to purchase an annuity that pays out until the child turns 18, offering some tax advantages.

It’s important to review and update your beneficiary designations as life circumstances change. These changes could be marriage, divorce, the birth of children, or the death of a previously named beneficiary.

Vancouver Estate Planner

In the last year or so, I worked on two files where the beneficiary designations were not updated and the spouses and young children suffered significantly from a loss of assets and had to endure an unnecessary tax burden. Finally, they also had unexpected legal costs to try to resolve the issues. In both cases, the spouses had filled in the forms prior to marriage and did not update them with the employers or financial institutions. 

As you can imagine such a situation can cause an enormous amount of stress and family disharmony. In the case of a RRSP or RRIF, the situation is further magnified by the fact that these assets are fully taxable as straight income as of the date of death. However, if the surviving spouse is the named beneficiary, then tax rules allow the spouse to defer the taxes during his or her lifetime. But this tax deferral is lost if the funds are given to anyone else.  In practice, this means when the entire fund is given to another relative, the estate bears the entire cost of the tax, which means even less money is available for the beneficiaries of the Will who may be the surviving spouse and/or children. Essentially, the surviving spouse who did not receive the RRSP/RRIF proceeds now also has to pay for the taxes in respect of it out of the estate. 

Vancouver Estate Planner

If you have life insurance policies (including ones through your employer), registered accounts or segregated funds, I recommend that you review your beneficiary designations with your employer and financial institutions. I urge you not to wait to do this. It is not unheard of for information on these forms to be entered incorrectly into databases or for forms to get lost years later; so even if you think you have things in order, mistakes do happen and double-checking is worthwhile. 

If you are in doubt about how to fill out the forms, you should consider naming your estate as the beneficiary. This way, your Will instructs how your life insurance policy or registered funds will be distributed. As long as you continue to update your Will to reflect changes in your life, your loved ones will benefit from those assets (assuming there is no estate litigation). The only downside is that the assets that form part of your estate will be subject to probate fees, if any. In British Columbia, this fee is 1.4% of the total value of the Estate and varies depending on where you live. But it is a small amount for your estate to pay compared to benefiting the wrong individual(s) at the end of your life.  

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If you are a financial professional, I recommend you take the time to review the beneficiary designations annually with your clients to make sure they are appropriate depending on their changing life circumstances. There may also be legitimate reasons for naming other family members or loved ones and for having the funds fall outside of an estate so those strategies should be discussed as well, and your client’s intentions should be documented in writing. 

Reach out to us now if you need more explanation or help with anything relating to estate litigation and family law!

DISCLAIMER: The updates and posts on this site are not legal, investment, accounting or tax advice/opinions. Readers should not act on the basis of these updates and posts without first consulting with a lawyer, accountant or appropriate professional advisors.

 

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