RRSPs: Does It Really Matter Who You Designate as Your Beneficiary?

When you set up a registered retirement savings plan (an “RRSP”), you will likely be asked who you would like to designate as the beneficiary. This means that when you pass away, the designated beneficiary will inherit any funds held in the RRSP. But does it really matter who you name as the beneficiary?

For income tax purposes, the government deems you to have disposed of all of your assets on the date of your death. Therefore, any capital gains owing on the RRSP will be included on the income tax return for the year of death. However, certain exemptions for your RRSPs are available. If, for example, you designate your spouse or common-law partner as your beneficiary, the RRSP will likely qualify for a rollover. This essentially means that the RRSP can be transferred to the beneficiary on a tax-deferred basis.

However, if you do not designate a qualified beneficiary, then any taxes owing from the deemed disposition of the RRSP will not qualify for the rollover. Because an RRSP is an asset that falls outside of an estate, the RRSP will be transferred to the designated beneficiary and the estate will be left with the tax bill. This may not be of concern if the RRSP beneficiary is also one of the main beneficiaries of the estate. But if you designate your adult independent child as the beneficiary of your RRSP and your spouse as the sole beneficiary of your estate, the taxes owing will reduce the amount your spouse will receive from your estate.

There are circumstances where non-qualified RRSP beneficiaries have been held liable for the tax consequences, but these situations are very fact specific. In Morrison Estate (Re), 2015 ABQB 769, an independent adult child was designated as the beneficiary of the deceased’s RRSPs. Due to the tax liability associated with the RRSP that fell to the estate, there were insufficient estate assets to fulfill the specific bequests that the deceased had left to his grandchildren. The Court ordered the independent adult child beneficiary to pay the taxes on the RRSP, as it was found that the deceased either did not understand that the taxes would fall to his Estate, or because he was under the impression that his son would be responsible for the taxes.

Because the tax implications for an estate could be severe, it is always a good idea to speak with an expert when planning your estate.