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

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I read in a previous MoneySense article that all taxes on the RRIF would be included on the deceased’s final income tax return. Does this mean that the estate, and not the beneficiary, pays income tax on the amount in the RRIF?

FPAC replies:

The consequences of taxes and beneficiary designations on registered accounts such as RRIFs can be confusing. Throw questions about estate and they’ll be even more. Sometimes this confusion results in estate goals not performing as intended.

Let’s use a few examples from Josie, her husband Manwar, and her brother Noah to illustrate. Josie has $ 100,000 in her RRIF and recently passed away.

Scenario 1

Josie lists her husband Manwar as a direct beneficiary on her RRIF contract. What happens after Josie’s death? (For the purposes of this illustration, we did not differentiate between designating your spouse or partner under common law as a beneficiary and a Successor annuitantalthough both can achieve the same goal of tax-free rollout of your RRIF. Appointing a successor is easier to manage, while determining a beneficiary is more steps but can allow for better planning of the deceased’s ultimate return.)

Result

Upon death, the fair market value of Josie’s registered accounts, including her RRIF, will be taxable as income on her final tax return, unless the spouse rollover provision applies. Since Josie and Manwar are married, the proceeds of Josie’s RRIF can be transferred to Manwar without tax. And since Manwar was listed as a beneficiary in the RRIF contract, the RRIF funds are not part of the estate for estate purposes.

Scenario 2

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

Result

After Josie’s death, her RRIF proceeds will be guided by her will and are therefore subject to all applicable regulations estate Fees (which vary by province and area). However, your executor may still apply the spouse rollover provision, in which case no income tax would be payable on the RRIF funds transferred to Manwar.

Scenario 3

Josie is close to her brother Noah and wants to split her estate equally between her brother and her husband. Josie listed Noah as a direct beneficiary on her $ 100,000 RRIF. Her only other asset is a high yield savings account in her name with a balance of $ 100,000. She intends that the money in her savings account will go to her husband Manwar. What if Josie dies?

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