How is a RRIF taxed in the hands of a beneficiary?

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A MoneySense reader writes:

If a registered retirement income fund (RRIF) is left to a named beneficiary, will the beneficiary have to pay income taxes on the RRIF amount? I read in an earlier MoneySense article that all the taxes on the RRIF would be included on the deceased’s final income tax return. Does that mean the estate, and not the beneficiary, pays the income tax on the amount in the RRIF?

FPAC responds:

The consequences of taxes and beneficiary designations on registered accounts like RRIFs can be confusing. Throw in questions about probate and they become even more so. Sometimes this confusion results in estate goals not being carried out as intended. Let’s illustrate using some examples of Josie, her husband, Manwar, and her brother Noah. Josie has $100,000 in her RRIF and has recently passed away.

Scenario 1

Josie lists her husband, Manwar, as the direct beneficiary on her RRIF contract. What happens upon Josie’s death? (For the purposes of this illustration, we did not distinguish between designating your spouse or common-law partner as a beneficiary versus a successor annuitant, although both can accomplish the same objective of a tax-free rollover of your RRIF. Naming a successor annuitant is simpler to administer, while designating a beneficiary involves more steps but can allow for enhanced planning on the deceased’s final return.)

Outcome

Upon death, the fair market value of Josie’s registered accounts, including her RRIF, is taxable as income on her final tax return, unless the spousal rollover provision applies. Because Josie and Manwar are married, the proceeds of Josie’s RRIF can be transferred to Manwar without any tax payable. And because Manwar was listed as the beneficiary on the RRIF contract, the RRIF funds do not form part of the estate for probate purposes.

Scenario 2

Josie has listed her estate as the beneficiary on her RRIF, and Manwar is the sole beneficiary of her estate.

Outcome

Upon Josie’s death, her RRIF proceeds will pass through her will and are thus subject to any applicable probate fees (which vary by province and territory). However, her executor can still apply the spousal rollover provision, and in that case no income tax would be payable on the RRIF funds transferred to Manwar.

Scenario 3

Josie is close with her brother Noah and wants to split her estate equally between her brother and her husband. Josie has listed Noah as the direct beneficiary on her $100,000 RRIF. Her only other asset is a high-interest savings account in her name, with a balance of $100,000. She intends for the funds in her savings account to go to her husband, Manwar. What happens when Josie dies?

Outcome

Because Josie’s brother Noah is the direct beneficiary of the RRIF, the full amount of the RRIF proceeds will be transferred to him. As she has designated him as the direct beneficiary of her RRIF, the funds will not be subject to probate. However, because the spousal rollover provision does not apply, the RRIF will be fully taxable. While the Income Tax Act states that both the deceased’s estate and the RRIF recipient are “jointly and severally liable” for the income tax bill, in practice the Canada Revenue Agency only requires the beneficiary to pay the tax bill if the estate is insolvent. Therefore, in Josie’s case the tax would likely be paid from the high-interest savings account proceeds that are meant for Manwar, and he will receive less of Josie’s estate than Noah.

Takeaways

Spousal rollover provisions mean that income tax on registered accounts like RRIFs is not payable on a RRIF if the spouse is either a direct beneficiary or a beneficiary through the will. When the beneficiary spouse dies, whatever is left in the RRIF is taxable on their final tax return.
A direct, non-spouse beneficiary on a RRI—like Josie’s brother in Scenario 3—will receive the full amount of the RRIF proceeds. However, because the spousal rollover rules do not apply, the RRIF will be fully taxable when the original owner dies. Both the deceased’s estate and the RRIF recipient will be liable for the income tax due on the RRIF (although, unless the estate is insolvent, it will usually pay the tax).
Assets passing outside of the will (as is the case with a named RRIF beneficiary) can potentially cause unintended inequitable distributions of your estate.
A direct beneficiary designation on a RRIF avoids probate fees. However, keep in mind that a misplaced emphasis on avoiding probate can be detrimental to achieving your true estate goals—and can even cause hard feelings among your intended beneficiaries.

Proper estate planning for RRIF beneficiary designations is important for many reasons—including if you want your beneficiaries to be able to have dinner together after you are gone. To ensure you have an estate plan in place, speak to a qualified advisor to ensure the spirit of your wishes are properly reflected in the mechanics of your estate plan. This response was provided by FPAC Member Morgan Ulmer, a Certified Financial Planner who leads the Calgary office for the fee-for-service financial planning firm Caring for Clients. She has been involved in the financial services industry for 20 years. This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability. Qualified Advice is written by members of FPAC (Financial Planning Association of Canada) is a MoneySense content partner. The association’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect of other respected advisory professions, working closely with governments, regulators, financial planners, academia, vendors and the general public.

Comments Cancel reply

James Stumpf says:

March 22, 2021 at 2:49 pm

Getting an RRSP was my biggest mistake. It is purchased with after tax money. If and when I take any of my money out I am not only taxed but must add to my income at tax time which could put me into a higher tax bracket. Now not only is mt estate going to be taxed when I pass but my beneficiary will also be taxed. Taxed 5 times on one RRSP. BIG MISTAKE
.

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Sarah says:

March 22, 2021 at 11:47 pm

In the case of Scenario #1, assuming spouses as declared beneficiaries, are the rules the same if it’s a LIF (versus a RRIF)?

Can you comment on monies from a Canadian Corporation (wholly owned by a spouse) upon death? I’ve heard that the monies are considered “capital gains” (for tax purposes). Would it be beneficial if the spouse was equal owners (in the Canadian Corporation)?

Thank you for the article.

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N M says:

April 25, 2021 at 4:09 pm

Re James comment, for others who may be reading.

An RRSP is purchased with after tax money, but you already got the benefit in the form of a tax refund or tax not paid. So zero tax there.
If you withdraw, there is withholding tax, but you are only taxed more at income tax time if the withholding tax was insufficient. That’s one tax.
If you don’t withdraw, then it goes to your estate when you die and it is taxed. Once.
If it goes through your estate to a beneficiary the net amount is not taxed.
If it doesn’t go through your estate to a beneficiary the amount is taxed. Once.

The percentage amount of the tax may be different based on your situation in each of these scenarios. Your money will only flow through one path, start to finish, but planning is about considering the different possibilities and which one is best.

There may not be that much difference between some of the scenarios for people who don’t have a lot of money.

I suggest working with a financial planner, or just someone who’s good with spreadsheets, to show you the different paths.

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anthonhy Choi says:

May 23, 2021 at 2:47 pm

My mom had RRIF under Seg fund, once she had passed away, I am assuming the RRIF in the Seg fund will be paid out to the beneficiary first, and then we will use the $ to pay the tax, is this correct?
Usually you will have to clear the tax first before you get the paid out, but in this case, because the $ is in the Seg fund, so it is different?
Thanks for the time

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1. MoneySense Editors says:
  
  May 24, 2021 at 8:32 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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NELLIE SCHMIDT says:

June 19, 2021 at 3:23 pm

I have a RRIF that I own and one that I received at the time of my husbands death. I have made my children beneficerys of mine and my dead husbands share to his children upon my death. How will that be taxed I did not mention it in my will it is through the bank. Is my income tax for the year of my death responsible for the full tax. thank you

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1. Courtney Reilly-Larke says:
  
  July 29, 2021 at 11:07 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
  
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Linda M Cole says:

November 15, 2022 at 3:17 pm

I am single and wonder if I can make my RRIF beneficiary a charity? Will it be tax free as it would if I were to have a spouse as beneficiary? Thank you.

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1. MoneySense Editors says:
  
  November 23, 2022 at 5:23 pm
  
  Thank you for the question. We invite you to email it to [email protected], where it will be considered for an update or future articles.
  
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Paul Gawalko says:

February 13, 2024 at 3:16 pm

I am the executor and am the beneficiary of my wife’s RIF. Can I cash in her RIF ,put the money into the estate and then pay the tax on her final income tax from the estate.

If this is not possible, then others should be informed that it might be better to cash in the RIF before she passes away

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