Feigenbaum Law

Failure to Designate a Beneficiary When Converting an RRSP to a RRIF Results in Tax Bill

Cross-Border Estate Planning
Personal Tax Planning
January 31, 2020

One of the primary reasons you may engage in estate planning can be to limit the amount of tax that is payable by the estate in the event of your death. A recent story shared by CTV News in Calgary covers the story of a woman who was left with a $270,000 bill to the Canada Revenue Agency as the result of an oversight in her husband’s retirement planning.

A Small Oversight Leads to a Significant Tax Bill

The story explains that the husband, who died in 2017, had switched his Retirement Savings Plan into a Retirement Income Fund when he turned 71-years-old in 2014. It seems that an important detail was overlooked during this process. The husband did not name the wife as the beneficiary of the RIF, which meant that her name was not automatically applied to the RIF upon the husband’s death. The wife told CTV that she was unable to transfer the funds from the husband’s RIF to her own account without paying taxes on the estate, which was worth $460,000. The tax on the estate was assessed at $270,000. The wife claimed that “this is an error on the bank” and feels she should not be on the hook for their oversight, adding “The CRA has issues, they don’t know how to fix it. (The bank) doesn’t know how to fix it. Nobody seems to know how to fix this.”

A representative from another bank confirmed that a new beneficiary must be named when an RSP is converted to an RIF, since the process creates a new contract. She told CTV, “I see many people come to me with no beneficiary either on their RSP, or the investment or product after called a RIF, a retirement income fund, and that leaves it up to the estate which is subject to taxation.”

While the wife has taken out a loan to pay the bill, she’s still fighting to get the money back.

The CRA Process for Transferring a RRIF Without Estate Tax

The CRA did not speak to CTV about the details of this story but did provide information about the general process for transferring funds from a deceased spouse’s RRIF to their own RRSP.

If the taxpayer spouse is not listed as a beneficiary to their deceased spouse’s RRIF, they may still be able to transfer the funds from the RRIF to their own RRSP if the conditions outlined below are met:

  1. They must be a beneficiary of the deceased’s estate.
  2. They must file jointly with the deceased spouses’ legal representative a Form T1090, Death of a RRIF Annuitant – Designated Benefit or Joint Designation on the Death of a PRPP Member. This will have the effect of designating all or part of the amount paid to the estate as a designated benefit received by the surviving spouse.
  3. The spouse would then receive a receipt for the full amount transferred to their own RRSP.
  4. They would then use the receipt to claim a deduction on their Income Tax and Benefit Return for the year in which the funds were transferred.

It should be noted that this process would not be possible if another person besides the surviving spouse was listed as the beneficiary to the RRIF proceeds.

Consult With an Experienced Tax and Estate Lawyer

When planning an estate it is key to consider all possible tax implications upon one’s death. As demonstrated by the situation above, a slight oversight can end up costing surviving loved ones and family members significantly in taxes. At Feigenbaum Law, we are extensively experienced in both estate planning, as well as personal tax planning and compliance. We will review your situation with you and make recommendations that will best protect your estate from tax liability so that you can ensure the security of your legacy and your family’s financial position when you’re no longer around.

If you need a custom solution to your personal tax planning needs in either the United States or Canada, contact the experienced legal team at Feigenbaum Law. We can be reached online or by phone at (905) 695-1269 or toll-free at (877) 275-4792.

Tagged: estate planning, probate tax, tax planning