When a person dies their RRSP and RIFs are taxed as income to the deceased in the year of their death. Because of this the tax is subtracted and can often be 40 to 50% of the amount held in the retirement plan. The deceased’s estate pays the tax and the person who is named as the beneficiary receives the entire pre-tax amount of the plan.
In a 2015 decision in Alberta, Morrison v. Morrison (2015) ABQB 769, the court found a way to remedy this unfairness by imposing a Constructive Trust and stated that the beneficiary of the plan was required to reimburse the estate for the amount of the tax because the beneficiary was “unjustly enriched” as a result of the beneficiary designation.
Constructive Trusts will only be imposed however if a person can be shown to be unjustly enriched by the gift they have received. This will require evidence of the intention of the testator and the circumstances of the beneficiary. Was the testator aware when they made their will that the retirement plan would be taxed in the estate and the beneficiary would receive the entire pre-tax amount?
As a result of this court decision it’s a good idea for testators to state in their wills who they intend to pay the tax on their retirement plans. For example their will could confirm that they have named a person the beneficiary of their retirement plan and whether or not their intention is that the beneficiary would be required to reimburse their estate for any tax which is payable on the testator’s death from the deemed disposition of the plan.
FAQ
1) What if my spouse is the beneficiary of my RRSP or RIF? Is it still taxable on my death?
If one spouse passes away, the surviving spouse can receive the RRSP or RIF funds via spousal rollover meaning the tax can be deferred until the surviving spouse withdraws the RRSP/RIF funds, typically on retirement when they will likely be in a lower tax bracket.
2) Can I name my estate as the beneficiary of my RRSP or RIF?
Yes, you can name your estate as the beneficiary of your RRSP or RIF. The funds would pass to the beneficiaries of your estate in accordance with the terms of your will, and your estate would pay the tax on the RRSP or RIF. There will also be probate fees assessed against the value of your RRSP of approximately 1.4% so that is also something to consider when deciding whether to name your estate or a beneficiary.
3) If I designate a beneficiary on my RRSP or RIF and want the beneficiary to pay the tax, what should my will say?
If your RRSP or RIF has a designated beneficiary and you want to be sure the beneficiary pays the tax, rather than your estate, your will could say “it is my intention that [name of beneficiary] be required to reimburse my estate for any tax which is payable in respect of any benefits under any Registered Retirement Savings Plan and any Registered Retirement Income Fund passing to that person on my death.”
Deborah A. Todd
