A Registered Retirement Savings Plan (RRSP) is essentially a special savings and investment account authorized and registered with Canada Revenue Agency where an individual can contribute a percentage of his or her annual earnings. Amounts contributed in any tax year can be deducted from your taxable income for that tax year, to a certain maximum. All income earned on funds in this account are tax exempt as long as they are not withdrawn from the account. On the last day of the year in which you turn 71, your RRSP must be converted into what is known as a Registered Retirement Income Fund (RRIF). Earnings within a RRIF remain tax exempt, but there’s an annual amount which you are required to withdraw and pay income tax on. The important aspect to remember is that RRSPs and RRIFs only allow for the deferral of income tax and do not provide a complete exemption from paying taxes. Generally, as funds are withdrawn from an RRSP or RRIF, either voluntarily or as required once an RRIF is established, income taxes are payable on the amounts withdrawn.

What Happens in the Event of Death

In the event of death, the value of your RRSP and/or RRIF is taxed as ordinary income in the year of death. Only in the circumstances where the RRSP or RRIF is either being transferred to your spouse or a dependant child, can the income tax be deferred until the death of your spouse or dependant child. So where the funds are not being transferred to a spouse or dependent child, the value of the RRSP or RRIF may be substantially absorbed by the tax liability incurred by it being viewed as taxable income.

Charitable Giving

Your RRSP or RRIF can be gifted to a charitable organization which will entitle your estate to a charitable receipt for the value of the RRSP or RRIF. This charitable receipt can then be used to offset the tax liabilities incurred at your death. As discussed in the previous article, the Income Tax Act expands the charitable tax credit available to an individual in the year of death, providing you with the ability to claim a charitable tax credit in equivalent to 100% of your taxable income for the year of death.

There are two ways in which an RRSP or RRIF can be gifted to a charitable organization at your death.
1. You can designate the charitable organization as the beneficiary directly with the RRSP or RRIF holder. This is generally the preferred manner, as the gift of the RRSP or RRIF then becomes completely independent of your will and results in a very simple process. Upon receipt of your death certificate, the RRSP or RRIF holder is automatically authorized to pay the funds in the RRSP or RRIF to the designated charity and the charity is authorized to provide your estate with a charitable receipt.
2. You can make a provision in your will that specific RRSPs or RRIFs owned by you are to be paid to certain charitable organizations. This is often used when the RRSP or RRIF account is substantial and you would like the funds of the account divided between several charities or only a portion of the value to go to charitable organizations. The process of making this gift is often somewhat more complex as the RRSP or RRIF holder will require formal proof of the executor of the estate and their authority to deal with the assets of the estate.

Maria Kinkel is a lawyer and partner with the firm MHN Lawyers LLP in Simcoe, Ontario and a director with Parkview Meadows.

The material presented in this article is intended for information purposes only and does not constitute legal advice.

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