Taxation: RRSP & RRIF & TFSA (16:XIII)

A. RRSP: Registered Retirement Savings Plan

In British Columbia, a person may by will gift a property which he or she is entitled at law or in equity at the time of his or her death. This means that the proceeds from a deceased’s Registered Retirement Saving Plan (“RRSP”) can be distributed to the beneficiary by the executors in trust after all the debts have been paid. However, please note that your beneficiary may need to pay taxes on reception of the RRSP. This will be taxes as their income for that year. A person is “deemed” to have disposed of all assets at the moment before death, and is accordingly taxed in the year of death as such. For example, if the deceased owns a rental property, then that rental property is considered sold at the moment of the deceased’s death and as a result, the deceased will have earned capital gains from this sale. Taxes will then be paid on these capital gains. Additionally, the value of any RRSP or RRIF will also be considered to have been earned in the year of death. This is significant because the inclusion of all these capital gains will most likely bump the deceased to the highest tax bracket. In B.C., this bump could mean that an individual is taxed close to 50% of the income. The major exception to this rule is the “spousal rollover” rule in section 73 of the Income Tax Act (“ITA”). This rule effectively defers payment of taxes owing from the deemed disposition if the asset is given to the spouse of the deceased until the death of the spouse. If a beneficiary has been designated to receive the proceeds of a RRSP, those proceeds will pass directly to the beneficiary. However, the deceased will be considered to have earned the entire value of the RRSP during his or her year of death and the estate must declare the value of the RRSP on the T1 Terminal Tax return. Accordingly, unless a roll-over provision, such as the spousal roll-over applies, the Estate will be liable to pay taxes on the value of the RRSP. If the Estate is unable to pay the taxes, the beneficiary receiving the proceeds will be liable to pay the taxes owing (s 160.2(1) of the ITA provides that the the estate and a designated beneficiary are jointly and severally liable for tax on the value of the RRSP at the date of death).

B. RRIF: Registered Retirement Income Fund

The same rules applies to RRIFs as they apply to RRSPs.

C. TFSA: Tax-Free Savings Account

TFSAs receive specialized treatment under the Income Tax Act, however, TFSAs came into effect in 2009, so for deceased taxpayers that died in 2008 or earlier, the proportion of the chapter will not be material to the estate. The fair market value of the TFSA will be received by the estate of the deceased taxpayer or any gains that accumulated in the account will continue to be tax-free until the end of the year following the death of the account holder. The tax-free status of the TFSA is preserved if the deceased taxpayer named his/her spouse or common-law partner as the successor account holder. It is unlikely that tax liability for the income generated by the TFSA from monies contributed to the TFSA during the taxpayer’s lifetime. This is different from RRSPs or RRIFs.

A voluntary transfer of property from one person to another, without expectation of payment or reward. Gifts to one spouse do not usually qualify as family property, and are excluded from the pool of property to be divided. See "donee," "donor," "excluded property" and "family property."

Something which can be owned. See "chattels" and "real property."

(1) A person for whom a trustee holds a trust, or (2) the recipient or intended recipient of property given in a will. See "heir" and "trust."

A phrase describing how property is held by one person for the benefit of another person who is ultimately entitled to the use or proceeds of sale of that property. Money held in trust is held in a lawyer's bank account on behalf of a client, on the lawyer’s promise not to use that money except as may be agreed.

An agreement to transfer the ownership of property from one person to another in exchange for the reciprocal transfer of something else, usually money. See "agreement."

Under the Divorce Act, either of two people who are married to one another, whether of the same or opposite genders. Under the Family Law Act, spouse includes married spouses, unmarried parties who have lived together in a marriage-like relationship for at least two years, and, for all purposes of the act other than the division of property or debt, unmarried parties who have lived together for less than two years and have had a child together. See "marriage" and "marriage-like relationship."

In law, all of the personal property and real property that a person owns or in which they have an interest, usually in connection with the prospect or event of the person's death.

In law, something that is relevant or important. A material fact, for example, is a fact relevant to a claim or a defence to a claim. See "claim," "evidence" and "fact."

A term describing the value of real property or personal property in terms of the amount a reasonable third party would pay for the property at its current location in its current condition.

In law, (1) a lawyer's bill to their client or a statement, or (2) a person's recollection of events.