LEAVING A LEGACY

Designating a beneficiary on an RRSP or RRIF

Designating a direct beneficiary on your RRSP or RRIF may be beneficial in some
situations; however, there are cases where designating your estate is the better option.*

01 Designating a beneficiary on your RRSP or

RRIF is often presented as sound financial
planning, since doing so can avoid probate
and probate fees.
If your RRSP or RRIF is paid to a qualified beneficiary,
then the tax can be deferred if your beneficiary
chooses to transfer the funds to their RRSP or RRIF.

02 However, a direct beneficiary designation can

result in some negative consequences such as
inequitable treatment of heirs, unintended
elimination of heirs and unexpected tax
consequences to the estate.
Taxation at death
If you designate a direct beneficiary to your RRSP or
RRIF, then upon your death the entire value of the RRSP
or RRIF will be paid directly to your designated
beneficiary, with no withholding for tax (except in
certain cases involving non-residents.) However,
when you die, the full value of your registered
investments will be included in your tax return in
the year of death.
Depending upon who you designate as your beneficiary,
your estate could be responsible for paying any resulting
tax liability. If your estate does not have sufficient
funds to cover the taxes owing, the Canada Revenue
Agency (CRA) can collect the taxes owing from your
RRSP or RRIF beneficiary. If your beneficiary is unaware
of this potential tax liability, he or she could be in for
an unpleasant surprise when a tax bill arrives. As the
settlement of the estate can take some time, there
have been cases in which the beneficiary has already
spent the inheritance before being notified of the
tax liability.
*This article is not applicable in Quebec.
A qualified beneficiary
can be either your spouse
or common-law partner or
your financially dependent
child or grandchild.
However, designating young children or grandchildren
as direct beneficiaries is not generally recommended.
Inequitable treatment of
heirs due to taxation
Because your estate is initially responsible for the
tax liability on your RRSPs and RRIFs, designating a
beneficiary could result in the inequitable treatment
of your heirs.
Example:
Alice was a resident of Ontario, and had three children
(Sam, Jamie, and Susan) and no surviving spouse.
She wanted each child to inherit an equal portion
of her assets.
When Alice died, her assets were comprised of
$400,000 of non-registered assets with a $200,000
capital gain and a $200,000 RRSP. Alice made Sam the
direct beneficiary of the RRSP, and her will divided the

| 01 |
rest of her estate (the non-registered assets) equally
between Jamie and Susan.
Alice thought that this would leave each child with
an equal portion of her assets. What Alice did not
take into account was the fact that there would be no
withholding tax on the payment of the RRSP assets
to Sam, and her estate would be responsible for paying
the income tax on the RRSP and the capital gain from
the non-registered investments, as well as any
probate fees.
Alice’s executor will have to add $300,000 of income
to Alice’s terminal tax return – i.e., $200,000 of income
from her RRSP and $100,000 of income from the taxable
capital gain on the non-registered investment. Assuming
a marginal tax rate of 50 per cent, the taxes owing would
be $150,000. In addition, Ontario probate fees on her
$400,000 investment would come to at least $5,500.
Thus, between them, James and Susan will only have
$244,500 to split, or $122,250 each, while Sam has an
inheritance of $200,000.
Planning for a blended family
Do you have a blended family? Would you like to
provide an income for your surviving spouse for the
remainder of your spouse’s lifetime, but ensure that
any remaining capital goes to your children, and not
your spouse’s family?
If your spouse inherits by direct beneficiary
designation, then you lose the ability to impose
any strings on that inheritance. You can instead
indicate in your will that the RRSP or RRIF is to be
payable to a trust for your spouse – but recognize
that any rollover will be lost in that case, and taxes
will be owing when you die.
Alternatively, you could use life insurance or other
assets to provide your children with an inheritance
and leave the RRSP or RRIF to your spouse, or you
can indicate that your spouse will inherit the value of
the RRSP or RRIF, but on condition that he or she will
transfer the amounts to another registered investment
so that the estate is not liable for any taxes in respect
of the RRSP or RRIF. If your spouse chooses to take a
payment in cash from the estate, then you can direct
your executor to only pay the after-tax value of the
RRSP or RRIF to your spouse. However, you cannot
| 02 |
impose these types of conditions if you use a direct
beneficiary designation.
Locked-in accounts
Do you have a locked-in account (including a
locked-in retirement account (LIRA), a life income
fund (LIF), a restricted life income fund (RLIF), a
locked-in retirement income fund (LRIF), or a
prescribed retirement income fund (PRIF))?
Your ability to name a beneficiary on a locked-in
account is restricted by the pension legislation
that governs the plan. If you are the annuitant of a
locked-in account and you have a spouse as defined
in the relevant pension legislation at the time of your
death, your spouse will almost always be automatically
entitled to the proceeds of the account.
Your spouse can waive his or her right to the death
benefits from a locked-in plan subject to the pension
rules of Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland and Labrador, Ontario,
Québec and Saskatchewan, allowing you to designate
a non-spouse beneficiary, but your spouse can also
revoke his or her waiver at any time prior to your
death. A spouse cannot waive his or her rights to
the death benefits of a plan subject to federal or
Nova Scotia rules.
Example:
Ken is divorced, has an adult child (Kate) and lives in
British Columbia. He has a locked-in account subject
to British Columbia pension legislation, and
designates Kate as his beneficiary.
Ten years later, Ken gets married to Gail, and two
weeks after that, Ken dies. Gail did not sign a
prescribed waiver form, so the proceeds of the
locked-in account will be paid to Gail, even if Ken
might have preferred to have them paid to Kate.
Because Ken had assumed that Kate would receive
his locked-in plan, he did not make alternate
provisions for her in his will.
Avoid designating minors
Use extreme caution when designating minors or even
young adults as direct beneficiaries of an RRSP or RRIF.
Your will can appoint a trusted individual to act since they usually don't receive anything until all the
as trustee over the funds, and distribute them in a primary beneficiaries are deceased, and it is possible
controlled manner (e.g. part at age 25, part at age 30 that more grandchildren could be born after the time
and the remainder at age 35). If you designate a minor of your death. Also, in many cases, grandchildren
as the direct beneficiary, then in many cases the funds are too young to receive a lump sum (see previous
will be inaccessible until they reach the age of majority, discussion on leaving amounts to minors). Unless you
at which point they will receive a lump sum. In most have an only child, who is sufficiently mature to receive
instances 18 or 19 year olds are too young to manage the funds, it may be easier to have the funds distributed
large sums of money. Speak to your estates lawyer if through your estate than through a direct beneficiary
you intend to leave these funds to a young person. designation in favour of multiple individuals.
Designating a beneficiary on an RRSP or RRIF should
Avoid designating multiple or not be considered lightly. Although it is quite common
contingent beneficiaries for individuals in a first marriage (or common-law
Another strategy that can cause problems is when too relationship) to designate their spouse as their direct
many beneficiaries are designated. For example, if you beneficiary, designations in other life scenarios are not
are widowed and have three children to whom you quite so simple. Speak to your financial advisor to
would like to leave your estate equally, it might ensure your beneficiary designations are structured
be better to simply designate your estate as the in a manner that meets your individual needs. 
beneficiary to ensure that everyone receives an equal
after-tax amount. If one of your children predeceases
you, the full amount in the plan will be paid to the If you have any questions about
survivors, potentially leaving out the children of
the pre-deceased child. Contingent beneficiaries designating a beneficiary on an RRSP
(for example, grandchildren) are also not recommended, or RRIF, I would be happy to help.

Adrian Brown
DIVISION DIRECTOR
Investors Group Financial Services Inc.

Tel: (613) 798-7700 ext 232

Adrian.Brown@investorsgroup.com
http://www.adrianbrown.ca

Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Great-West Life Assurance Company. Written and published by Investors Group as a general source
of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an Investors Group Consultant.
Trademarks, including Investors Group, are owned by IGM Financial Inc. and licensed to its subsidiary corporations.
© Investors Group Inc. 2013 MP1567 (06/2017)

INVES TORSGROUP.COM

| 03 |