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Whom you name as your account beneficiary—and whether you name one—can have tax and estate implications. Here’s what you need to know.
When opening certain investment accounts, investors may have the option to designate a beneficiary. It is important to consider the implications in order to minimize tax payable and ensure estate wishes are fulfilled upon the death of an account holder. (Note that residents of Quebec cannot appoint beneficiaries or successor holders, nor can they have their share of a joint account pass directly to the other accountholder under the right of survivorship. As a result, some of the concepts discussed in this article may not apply to Quebec residents, who may need to address certain accounts in their wills.)
Registered Retirement Savings Plans (RRSPs) and other registered retirement accounts, like Registered Retirement Income Funds (RRIFs) and Defined Contribution Pension Plans (DCPPs), can have beneficiaries named to receive the account proceeds upon an account holder’s death.
The most common beneficiary is a spouse or common-law partner. The beneficiary can have the tax-deferred funds remain tax sheltered by transferring them to their own registered account. Even if the spouse is not named as the account beneficiary, there may be other methods to have the account proceeds transferred on a tax-sheltered basis to the surviving spouse.
Some wills specifically address RRSP accounts. If a will states that a spouse is entitled to amounts from an RRSP, the spouse and the executor (who is often the spouse as well) can elect to transfer the account of the deceased on a tax-deferred basis. Alternatively, if the RRSP is not addressed in the will, but the surviving spouse is a beneficiary, as is often the case, it is possible to make the same tax-deferral election.
If children or other non-spouse beneficiaries are named in an RRSP contract, tax is generally payable by the estate of the deceased on the market value of the account at the time of death. There may be exceptions for dependent children or grandchildren, allowing tax-deferral using a term-certain annuity to age 18, or for disabled children or grandchildren, by way of a transfer to their RRSP or Registered Disability Savings Plan (RDSP).
There are benefits to naming individuals as beneficiaries for an RRSP account. In particular, the account will be distributed relatively quickly following death, and without incurring probate fees or estate administration tax.
There are drawbacks, however. Naming an individual does not allow for contingencies that can be addressed in a will by naming your estate as beneficiary, like having a child’s share of your RRSP go to their children (your grandchildren) if the child dies before you or at the same time as you. This may seem unlikely, or you may think you can simply update your beneficiaries if this happens—but what if you become incapacitated as you age and you are no longer able to update your beneficiary designations? Someone acting as power of attorney cannot change testamentary wishes like beneficiary designations or your will.
A tax-free savings account (TFSA) can have a beneficiary or a successor holder. Only a spouse can be a successor holder. The benefit of naming a spouse as a successor holder is that they can take over a TFSA account upon the death of their spouse without impacting their own TFSA room or without any potential tax payable.
If a spouse is named as a beneficiary, a TFSA can be rolled into the survivor’s own TFSA without impacting their TFSA room by December 31 of the year following death. However, the exempt contributions are only up to the fair market value of the TFSA account at the time of death, and any subsequent income and growth is taxable up until the date of transfer.
A non-spouse beneficiary who is named for a TFSA will receive their inheritance relatively efficiently after providing a copy of a death certificate to the financial institution. Income earned after the date of death is taxable to the recipient and can only be transferred into their own TFSA to the extent that they have TFSA room.
Naming a TFSA beneficiary as one’s estate means that an account will be distributed based on the terms of a will. The TFSA proceeds are tax free to the estate, but subsequent growth after the date of death is subject to tax.
Registered Education Savings Plans (RESPs) are established for a beneficiary or beneficiaries to save for their post-secondary education. It should be noted, however, that an RESP beneficiary does not become the account beneficiary upon death. An RESP account is the property of a subscriber who opens and owns an RESP.
Some institutions allow joint subscribers, or the appointment of a successor subscriber, so that someone can take over an RESP account on the death of a subscriber.
You can also include a clause in your will to appoint a successor subscriber to administer an RESP account upon your death.
Failing to have a joint subscriber or naming a successor subscriber risks an RESP account becoming taxable, triggering repayment of government grants, and being subject to probate fees.
Non-registered investment accounts do not generally have beneficiaries, but may pass directly to a joint account holder or otherwise be dealt with in a will. Capital gains tax may only be deferred if the account passes to a spouse.
There may be exceptions for informal or formal trust accounts which, by their nature, are established for beneficiaries and held by a trustee. If a trustee dies, the trust does not necessarily come to an end, and may continue with other existing trustees or a replacement trustee. Likewise, the beneficiary may not immediately receive the account proceeds, which may continue to be held in trust until they attain the age of majority, or based on the terms of the trust deed.
Insurance companies offer Guaranteed Interest Annuities (GIAs) that are like traditional Guaranteed Investment Certificates (GICs), but are structured as life insurance contracts. As a result, they can have beneficiaries who receive account proceeds quickly and efficiently on death, avoiding estate administration and probate fees in the process.
Beneficiary designations may seem relatively straightforward—and they are, in many cases. Regardless, it helps to know the implications and alternatives in order to ensure your estate wishes are carried out properly.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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Hello Jason, great article with concise facts that will no doubt act as a great resource for many who had these questions. I have a follow-up about contingency beneficiaries that may prove useful for your readers and a question TFSA beneficiary tax post-death.
I currently have 2 RRSPs accounts (a work defined contribution plan and a personal RRSP; Manulife and Questrade, respectively) when I filled out the beneficiary declarations, none of these financial institutions provided an option for a contingent beneficiary, as you stated in your article. However, what I had done was add the contingent beneficiary myself by drafting a Letter of Direction, instructing the financial institution who my primary beneficiary and contingent beneficiaries are. It took some time to convince and explain what this was about, some even had no idea what I was talking about and had to explain the differences and their importance, but in the end, I provided what they had instructed me to do and I have on file in the event of my passing.
My 2 questions are with respect to the TFSA non-spouse beneficiary.
First, you mentioned that the designated beneficiary would provide the financial institution with a copy of the death certificate and the proceeds would then be distributed. The part I found confusing was income earned after death is taxable. It is my understanding that a non-successor beneficiary can only receive the proceeds as cash. That is, the financial institution will collapse the account and sell all products within the TFSA. So I’m not sure what income one can earn after death since it will be subsequently paid out to the beneficiary as cash.
The second question I wanted clarification was the part was when you mentioned that income can be transferred into the non-spouse beneficiary provided they had enough TFSA contribution room left over. How? It is my understanding that only a successor beneficiary can take advantage of this. Can a non-spouse beneficiary “transfer” the products from the deceased TFSA to their own (ie. Like for like)?
Thanks!
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
You cannot name a RRSP or TFSA beneficiary in Quebec, it has to be done by a will
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/completing-slips-summaries/t4rsp-t4rif-information-returns/death-annuitant/unmatured-rrsps/who-beneficiary-beneficiary-designated.html
Thanks for letting us know. We will update this as soon as we can. Our goal is to have the most up-to-date information. We do our best to fact check all our content before it gets published and make updates regularly, but some things may get missed. We would like to remind our readers to do their own fact checking before making any personal finance decisions.
Jason, I always enjoy reading your articles and it is rare not to learn something. I would like to mention that a charitable organization can be designated as a beneficiary of a registered account. This allows the charity to receive the proceeds entirely without any tax, and there are no tax implications to the estate. This is very generous with respect to an RRSP, which would normally be taxed entirely following the death of the second spouse. Of course, this does reduce the value of an estate for other beneficiaries, but if the second spouse feels strongly about certain charities, this is a very good way to support them. Note that this is much preferred instead of paying full tax on an RRSP, then giving a donation to specific charities which could be specified in a will.
Hello
Glad to see this topic being covered, as I preach it all the time.
However, there is an important point that is not explicit in your article.
Holders of Registered accounts in Quebec cannot simply specify a beneficiary on the account forms. In order to take advantage of the spouse or qualifying dependent “rollover”, the holder must bequeath these accounts in a will, in Quebec.
I understand that you operate in Toronto; however, Moneysense is surely read widely across the country.
It would be great if you point out, even without the detail, that the laws are different in Quebec, and must be verified.
Thank you
Thanks for letting us know. We will update this as soon as we can. Our goal is to have the most up-to-date information. We do our best to fact check all our content before it gets published and make updates regularly, but some things may get missed. We would like to remind our readers to do their own fact checking before making any personal finance decisions.
When there is non-spouse beneficiary named on the RRSP and TFSA accounts.
After the bank receive news from the executor that the account holder has died. Is there official procedure that the bank would reply and inform the executor of the circumstance? Inform therefore the funds in the account(s) would not forwarded to the executor. The executor will then convey the same information to the beneficiaries with documentation as to explain / prove that the funds in the account(s) would not be included in the estate?
Thanks.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Regarding RESPs:
Since your address below would not work I hope you will accept my question here. I invested in a family RESP for my grandchildren which remains unused. Because it is a family plan, had I additional grandchildren, they could be added. Since that is not the case, I would like to add my great-grandchild. The plan has about 22 years left to run – plenty of time to use it for my great-grandchild’s post secondary education. Can I do this or what are my options? Thank you for your most enlightening articles.
I understand that Payable on Death accounts (Bank Savings) can be set up to by pass probate fees in Ontario. Insurance companies have touted the benefits of having your non registered savings account held with them as they by-pass probate fees. So I am confused, if they both offer the same probate avoidance advantage, I assume maybe there are other factors that are now being disclosed such as (1) Privacy Issues (2) Creditor protection (3) If designated beneficiary dies before the contract owner?
Any thoughts on this?