Q: I’m wondering if there is a simple way to calculate the tax liability to named RRIF beneficiaries upon death of the account holder?
My wife’s mother passed away in October 2018. My wife was one of 3 named beneficiaries of a RRIF worth $265,000, and her share was $117,000 (44%). There are no estate assets from which to pay the income tax liability.
My wife knows that she will need to pay the income tax payable on her share, and she wants to prepay this into her own CRA account by April 30, 2019, to avoid penalty/interest. We live in BC.
How can we calculate the amount that will be owing?
A: I’m sorry to hear about your mother-in-law’s passing, Randy.
When someone dies and has a Registered Retirement Income Fund (RRIF) or a similar tax-deferred retirement account like a Registered Retirement Savings Plan (RRSP), there may be tax implications. If the account beneficiary is a surviving spouse or common-law partner, the tax payable may be deferred until that spouse takes withdrawals or dies.
If the beneficiary is a financially dependent child or grandchild who is either under the age of 18 or mentally or physically infirm, there may be tax deferral opportunities that include the purchase of a term-certain annuity to age 18 or a rollover to an RRSP or Registered Disability Savings Plan (RDSP).
Otherwise, when a child or another non-spouse beneficiary like your wife inherits a registered account, Randy, the taxation depends upon whether they are named directly as a beneficiary, or whether they are a beneficiary of the estate and the estate is the beneficiary of the account.
When the estate is beneficiary, the income is taxable, and the account proceeds paid into the estate can be used to pay the resulting tax. The fair market value of the RRIF account on the date of death of the deceased is the income that is taxable and included on their final tax return.
Tax payable will depend upon the other sources of income for the deceased in their year of death, as well any applicable tax decisions and tax credits. If someone has a lot of other income in their year of death, tax payable could be as high as 54 per cent depending upon the province in which they reside.
If a non-spouse beneficiary like your wife is named as beneficiary, Randy, the calculation of the tax payable is the same. That is, the fair market value of the account on their date of death becomes taxable on the final tax return of the deceased, even though the account proceeds were payable to your wife and others.
Assuming your mother-in-law had no other sources of income, and ignoring any tax deductions and credits, she would have approximately $99,000 of tax payable on a $265,000 RRIF account in the province of British Columbia.
If there are not enough assets in the estate to pay the tax owing – or even if the registered account is the sole asset and there is no money to pay the tax owing – the beneficiaries of the RRIF account are still liable for paying the tax on behalf of the deceased.
In your wife’s case, Randy, she will be liable for 44 per cent of the tax payable – her proportionate interest in the RRIF proceeds.
Your mother-in-law’s final tax return is due April 30, as is the tax owing on her final tax return. If the tax return is filed by that date, and the tax is paid, there is no risk of penalties or interest for your late mother-in-law or your wife.
So, you can choose to pay the tax early, but you don’t need to do so. I should clarify that the tax is payable to your mother’s tax account though, not your wife’s tax account, so that’s an important distinction. As far as determining the exact amount your wife should pay, it will be calculated on her late mother’s final tax return, so you can’t exactly estimate it. You just need someone to prepare her final tax return, and then confirm who owes what to the Canada Revenue Agency.
Since your mother-in-law’s RRIF account was her only estate asset, and her kids were named as beneficiaries, her estate should not likely need to file for probate, and no probate fees will be payable to the province of British Columbia.
It sounds like her estate will be relatively straightforward to settle, Randy, but you should work with your wife’s siblings to prepare and file her tax return before April 30 and coordinate the proportionate tax payable by everyone by that date as well.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.