Designating a RRIF Beneficiary
One of the unique benefits of an RRIF account is its ability to designate how your investments are transferred to your beneficiaries upon your death. The RRIF assets can be transferred directly to the beneficiaries you designate (in the RRIF account documentation) bypassing your estate, or the assets can be designated to form part of your estate and distributed according to the instructions contained in your will.
Whichever method you select, you should ensure that it is not at odds with your overall estate plan.
The following diagram illustrates the different possible ways in which you can designate a beneficiary:
Note: For RRIF accounts, a spouse or common-law partner that is designated as the account’s beneficiary is often referred to as the successor annuitant and designations other than the surviving spouse or surviving common-law partner are referred to as the beneficiary. For our purposes we will continue to refer to the designation of beneficiary.
When considering your choice of beneficiaries, you should understand that unless you designate your surviving spouse or common-law partner as your beneficiary, the Canada Revenue Agency (CRA) deems that your RRIF Plan was fully deregistered just before your death. As a result, the full fair market value of your RRIF is considered to be taxable income included in your Date of Death Income Tax Return. This means that if you designate a beneficiary other than your estate, the RRIF assets will automatically roll-over or transfer to your designated beneficiary, but your estate will be responsible for including the RRIF assets as income and pay any resulting income tax.
Note: Throughout this section our reference to spouse and surviving spouse also includes common-law partner and surviving common-law partner.
If your spouse is designated as the RRIF’s beneficiary or they are a residual beneficiary of your estate, the value of your RRIF assets are still to be included in your Date of Death Income Tax Return, but your estate’s legal representative will jointly elect to defer taxation from your estate’s hands into your spouse’s hands.
If your estate incurs the income tax liability for your RRIF, your overall estate plan should ensure that your estate retains sufficient assets to pay the income tax owing on your Date of Death Income Tax Return.
The designation of a beneficiary should be considered an estate-planning tool to assist in the successful distribution of your estate.
Note: When designing your estate plan and making your designation of beneficiary keep in mind that the CRA requires all of the minimum annual RRIF payment for the year of death be completed. Therefore, if you die in January and have not withdrawn all of the annual minimum payment from your RRIF account, then the withdrawal will be made and included in your Date of Death Income Tax Return. The RRIF assets to be transferred to your designated beneficiary will be the value of your RRIF assets less any unpaid minimum annual RRIF payment.
Important Tax Note: While it is generally accepted the deceased's estate is responsible for paying the income taxes that arise from a person's death, it should be noted that if the estate is insolvent or does hold sufficient assets to pay the estate's income tax bill, the Canada Revenue Agency (CRA) can require the RRIF's Designated Beneficiary to use all or a portion of the RRIF's assets received to pay any outstanding income tax owing by the estate.