What happens to a RRIF when the account owner dies?

If the RRIF is not set up this way, there will be immediate tax consequences, and the estate wishes of your husband may not play out as intended.

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What happens if you’re not named the beneficiary or successor owner of a RRIF

When a partner dies, the full amount of their RRIF will be added to their other income for the year and taxed at the current rate. For example, Shearer, if your husband is in Ontario and has an annual taxable income of $50,000, he would pay about $5,800 in tax, based on his marginal tax rate. 

If were to die on December 31 of this year, with $300,000 in his RRIF, his total taxable income will be $350,000. And his estate would pay about $148,000 in tax, again based on his marginal tax rate. An increase of approximately $142,000, almost 50% of the value of his RRIF.

If no beneficiary or successor owner is named within the will nor RRIF documents, the RRIF proceeds will pass through the estate and will be subject to estate administration tax. If there’s a beneficiary who’s not a qualifying survivor, which I will explain later, the RRIF proceeds will pass to them tax-free, and the estate will pay the tax. 

To help yourself understand that, think about what would happen if your husband has children from a first marriage. Using the $300,000 RRIF example above, the children would receive its proceeds tax-free, and your husband’s estate, possibly you, must come up with the money to pay the tax. If this is your husband’s second marriage (or yours), or either of you want to divide your assets unequally amongst your beneficiaries, make sure you understand the tax consequences you are putting on the estate and your surviving partner.

How to reduce or eliminate the tax consequences on the death of a RRIF holder

You can reduce or eliminate the tax on income from a RRIF upon your death by leaving it to a qualifying survivor. A qualifying survivor can be a:

• Spouse or common-law partner
• Financially dependent infirm child or grandchild
• Financially dependent child or grandchild

The first one is you, Shearer. So, you’re not going to pay tax on the RRIF, if your husband passes and you succeed him. You become the owner of his RRIF or the money goes into your RRSP or RRIF.

Should you be named a beneficiary or successor owner on a RRIF?

Canadians can name a spouse as either the beneficiary or successor owner of their RRIF. As a beneficiary, Shearer, you have the choice of either paying out the RRIF to your registered retirement savings plan (RRSP) and/or RRIF or taking the cash. If you take the cash or investments in kind, the RRIF value will be included with your husband’s other income for the year, as described above.

You may decide to take the proceeds of the RRIF in cash or in kind, if your husband has a small RRIF account and dies early in the year with little taxable income. It may be a way to get money out of the RRIF at a lower tax rate.

You have 60 days into the calendar year after your husband’s death to pay out the RRIF. Your husband’s RRIF will be closed and the Canada Revenue Agency (CRA) will issue you a T4RIF statement for the increase in value of his RRIF from the time of his death to your payout. You will then claim an offsetting deduction when you complete your tax return. 

As a successor owner, there may be a little less work for you. The RRIF is not closed; instead, you take over ownership of the RRIF and you are not issued a T4RIF for the increased value after your husband’s death. Also, if you have yet to convert your RRSP to a RRIF and your husband is younger than you are, you can maintain his lower RRIF minimum payments based on his age.

If there is a drawback to being named as a successor owner, it’s that you may not be able to reject the change in ownership and have the RRIF value added to your husband’s income, which you may do for small accounts. I had a similar situation where a client wrote the RRIF custodian asking that they not make her the owner of the RRIF, and they didn’t. The RRIF was paid to her husband’s estate. Talking to other planners since then, I have not been able to confirm if this is something that is permitted or if my client just got lucky.

Confirm if a widow spouse receives a RRIF

Shearer, check to see if you are a beneficiary or successor owner of your husband’s RRIF. If you are, everything should be good to go. While you are at it, if you have children, consider making them secondary beneficiaries of the RRIF. I know you can add them when your husband dies, but what if you don’t get around to it before your own death? It’s better to do it now and get it done.

Read more about transferring registered accounts:

• Can you transfer a RRIF to a TFSA—and what are the tax implications?
• RRSP to RRIF, and LIRA to LIF: How it all gets done
• How to cope with the RRSP-to-RRIF deadline in your early 70s

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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