Rotten RRIF Taxes Revisited

May 4, 2018

In the world of wealth management there are some topics that never get old and can not be overstated.  One such thread concerns the treatment by Revenue Canada of remaining registered account balances when a single individual passes away.  I have called this Canada’s stealth estate tax, but for today let’s just call it a rotten tax and one that is probably the least fair in the country.

Let us begin with a bit of a refresher on how the tax code works when we die.  First, there can be more than one tax return that gets filed when someone expires, depending on the person’s situation.  If you are the executor a person’s estate you will be responsible for ensuring that all taxes of the individual are paid, including those for prior years if the individual did not file.  A tax professional and estate lawyer will walk you through exactly what the tax filing responsibilities are, but for now we will limit our focus to the treatment of registered accounts like RRSPs and RRIFs.



On a person’s death, Revenue Canada mandates the value of all such accounts be included in income, unless a spouse, common law individual or financially dependent child or grandchild is entitled to these amounts.  A market valuation is taken of these accounts on the day of death and this information forms part of the reports required. It is possible to transfer amounts to the stated beneficiaries, in which case they be taxed in their hands (unless it is transferred into their own tax-deferred plans). This can happen even if they are not named beneficiaries on the plans, but simply in the will. You may also be able to roll amounts from the deceased person’s registered accounts into a Registered Disability Savings Plan (RDSP) for an infirm child or grandchild that is financially dependent.

Let’s assume that there are no beneficiaries where the amounts in the registered accounts can be transferred to.  What then is the potential additional tax hit to the estate? For illustration purposes we will assume the deceased is a resident of Ontario. Based on current rates, if an individual has taxable income in excess of $220,000 then the combined marginal tax rate will be 53.5%.  Note, this would include any other taxable income the person would receive in the year of his or her passing, such as CPP, OAS or pensions. Therefore, if the remaining value of the RRIF at death was in the neighbourhood of $200,000 the top rate would most likely kick in.



Remember, this is a marginal rate and not the average effective tax rate.  For example, while income over $220,000 is taxed at 53.5%, tax on the total amount would work out to about 37%.  Still, the larger the remaining balance in the RRIF the higher the taxable income and the average rate would climb.  For example, if taxable income was $500,000 the average rate would come to about 46%. In other words, the deceased is writing a cheque north of $236,000 to the tax man for the pleasure of passing away.

Some may say that this is an unlikely scenario, but if the individual had been a good saver, maxing out his or her RRSP during their work life and, unfortunately, died prematurely then it is not unlikely at all.

Again, the executor will be responsible for making sure all taxes are paid and this could become an issue if indeed there dedicated beneficiaries on the registered accounts.  Since these monies pay outside of the estate, this means if there are not sufficient funds inside the estate to pay the additional taxes then CRA will ultimately go to the beneficiaries for payment.  Given that it can take quite a while for the tax filing and review to take place, it is possible that beneficiaries may have spent their shares.

Except for the extreme public altruists, there is a wide consensus that this tax treatment is a problem. Assuming that the current government or future governments will change it is naïve.  Considering the demographic trends this is one of the biggest tax win falls in history.  And not creating an RRSP in the first place is not a solution either.  Again, there are ways to deal with this and it just requires careful strategic thinking to minimize it.



Upcoming events

Canada:  Housing starts, building permits, new house price index, employment

US:  Consumer credit, JOLTS job openins, producer prices, wholesale inventories, CPI, monthly budget statement, Univ. of Michigan sentiment



Click here to view the PDF version of the Newsletter


This publication has been prepared by an advisor of ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. All performance data represents past performance and is not indicative of future performance. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI. 

© 2018  The Pyle Group is a personal trade name of Andrew Pyle