In all provinces except Quebec, you can name your beneficiary directly within a registered account. In Quebec, the beneficiary can only be named in a will.
Let’s review who can be a beneficiary of your RRIF account and the tax implications depending on their relationship to you.
From the MoneySense Glossary:
A registered retirement income fund (RRIF) is an account designed to hold investments transferred from registered retirement savings plans (RRSPs) and certain other registered accounts. Canadians must close their RRSPs by the end of the year in which they turn 71.
Moving investments from an RRSP to a RRIF avoids the need to sell off the investments in the registered account and pay tax on any capital gains. After you open a RRIF, you will be required to withdraw a certain percentage of the balance each year according to your age.
Instead of converting an RRSP to a RRIF, you also have the option to cash out your RRSP or buy an annuity.
Who can be the beneficiary of a RRIF?
You have a few options for who can benefit from your RRIF account, Bob, which provides options for your estate planning by utilizing beneficiary designations in registered accounts.
- Married or common-law partner: If you want your RRIF to go to your spouse or common-law partner, you have the option to name them as a beneficiary, or you can name them the account’s successor annuitant, meaning that they will take over the actual RRIF account. A successor annuitant can only be a spouse or common-law partner. If your spouse has already passed, this is not an option for any other beneficiaries you may be considering.
- Financially dependent children or grandchildren: These are children or grandchildren who are dependent on you for financial support. An example of a dependent child/grandchild is a minor who lives with you and cannot earn their own income, or an adult child with a disability.
- Someone who is not financially dependent on you: This can be a family member, a friend or even a charity. You can also consider naming multiple beneficiaries from these different categories, for example, a dependent child and a non-dependent child as beneficiaries on the account. However, professional advice is recommended to ensure that you understand the best approach for the tax circumstances for everyone involved.
- No beneficiary designation: This means that the asset will be cashed in and flow through your estate and follow the instructions left in your will. If there wasn’t a will, then the estate will be distributed per the Succession Law Reform Act (this applies to Ontario; each province and territory has its own legislation).
Each of these options has different tax implications for your estate and the person or people receiving the RRIF. Let’s look at those next.
Tax implications for the RRIF
What happens to your RRIF when you die, and how your estate will be affected, depends on whom you name as the beneficiary. Let’s compare the tax implications for the situations mentioned above.
- Married or common-law partner: As the successor annuitant, your spouse or common-law partner will become the owner of your RRIF account when you die. The estate has no tax consequences because the RRIF’s value is not reported on your final tax return (also known as a terminal return). The successor annuitant then has a few options: They can transfer the assets to their own RRIF (or RRSP, if they’re under the age of 72). Or they can keep the account as is, receive the RRIF income, as applicable, and report this income on their tax return each year.
- Financially dependent children or grandchildren: RRIF assets would be transferred to these beneficiaries, and then your account would be closed. The estate does not have to include the value of the RRIF on your final tax return or pay income tax on it. The assets of the RRIF would be transferred into the beneficiaries’ own registered account such as an RDSP, and the beneficiary would be able to defer tax.
- Someone who is not financially dependent on you: The beneficiary would receive the assets in the RRIF, and then your account would be closed. The main difference here is that the value of your RRIF will be included on your final tax return, and your estate will pay the income taxes. This can be a source of contention if the estate pays taxes for assets that went to someone else entirely tax-free, leaving less for the estate’s beneficiaries. If your RRIF beneficiary is a charity, however, there can be a significant tax benefit, as the estate would receive a tax credit for the donation, which could lower or effectively eliminate the tax on the RRIF value declared on your final tax return.
- No beneficiary designation: The full value of the RRIF will be included on the final tax return and the estate will pay the taxes owing.
And if you want to divide up your RRIF between multiple types of beneficiaries, it’s best to seek advice from a financial professional, as the tax breakdown could be very complex.
Get RRIF advice from a financial planner
As you can see, Bob, you have various options for naming beneficiaries within your RRIF account, depending on your situation. Seeing as you have named your three adult children, and assuming that they are not financially dependent on you, this means that they will receive the assets on a tax-free basis; however, your estate will pay the taxes on your final return.
As with all aspects of an estate planning process, Bob, it is wise to consult a professional who can review your overall financial situation and inform you of all the tax impacts of your beneficiary designations and choices. A Certified Financial Planner is an excellent resource for information on registered accounts. They can walk you through the best options for your situation.