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


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

FPAC responds:

The consequences of taxes and beneficiary designations on registered accounts like RRIFs can be confusing. Throw in questions about probate and they become even more so. Sometimes this confusion results in estate goals not being carried out as intended.

Let’s illustrate using some examples of Josie, her husband, Manwar, and her brother Noah. Josie has $100,000 in her RRIF and has recently passed away. 

Scenario 1

Josie lists her husband, Manwar, as the direct beneficiary on her RRIF contract. What happens upon Josie’s death? (For the purposes of this illustration, we did not distinguish between designating your spouse or common-law partner as a beneficiary versus a successor annuitant, although both can accomplish the same objective of a tax-free rollover of your RRIF. Naming a successor annuitant is simpler to administer, while designating a beneficiary involves more steps but can allow for enhanced planning on the deceased’s final return.)

Outcome

Upon death, the fair market value of Josie’s registered accounts, including her RRIF, is taxable as income on her final tax return, unless the spousal rollover provision applies. Because Josie and Manwar are married, the proceeds of Josie’s RRIF can be transferred to Manwar without any tax payable. And because Manwar was listed as the beneficiary on the RRIF contract, the RRIF funds do not form part of the estate for probate purposes.

Scenario 2

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

Outcome

Upon Josie’s death, her RRIF proceeds will pass through her will and are thus subject to any applicable probate fees (which vary by province and territory). However, her executor can still apply the spousal rollover provision, and in that case no income tax would be payable on the RRIF funds transferred to Manwar. 

Scenario 3

Josie is close with her brother Noah and wants to split her estate equally between her brother and her husband. Josie has listed Noah as the direct beneficiary on her $100,000 RRIF. Her only other asset is a high-interest savings account in her name, with a balance of $100,000. She intends for the funds in her savings account to go to her husband, Manwar. What happens when Josie dies? 



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