| Glossary of
Financial Terms | | |
 The
Companion Advisor: Taxes
& Estates
Death and taxes - Part 7/7
Registered Retirement Income Funds (RRIFs)
The rules concerning the taxation of RRIF accounts
on death essentially mirror those for RRSPs, with some minor variations.
Generally, an annuitant of a RRIF must include, in income, the fair market
value of his or her RRIF on the date of death. This amount must be reported
on the terminal return, and tax will be payable at the deceased annuitant's
marginal rate for the year of death.
RRIFs share RRSPs' potential for tax deferral on the income inclusion
in the terminal return. When a RRIF is established, it is possible for
the annuitant to designate a successor annuitant and/or a beneficiary
of the RRIF.
A successor annuitant is the surviving spouse of the original annuitant
who, if designated by the annuitant, continues to receive RRIF payments
after the death of the original annuitant.
Alternatively, if a spouse is the named beneficiary of the RRIF, the value
of the RRIF at death qualifies as a designated benefit. This designated
benefit is not taxable to the deceased annuitant. Instead, it is taxable
to the surviving spouse, who can transfer this amount directly to his
or her RRSP or RRIF and can claim a deduction equal to the amount of the
designated benefit. By doing so, the value of the RRIF is simply transferred
into the surviving spouse's RRSP or RRIF and can continue to grow tax
deferred (less the required minimum annual withdrawals in the case of
a RRIF).
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Example #7
John (age 67), and Ann (age 72) are husband and wife. Ann has a
RRIF from which she is currently receiving payments each year. On
February 5, 2001, after Ann has withdrawn the minimum amount required
from the RRIF for 2001, she died.
If Ann had named John as the successor annuitant under the RRIF,
beginning in 2002 the RRIF payments would simply continue as before,
except they would be paid to John instead of Ann.
On the other hand, if Ann
had designated John as the beneficiary of her RRIF, the entire fair
market value at February 5, 2001 would be taxable to John as the
designated benefit. If John didn't need the income, he might choose
to transfer the amount into an RRSP instead of a RRIF, maximizing
the amount that can remain tax deferred. John is able to do this
because he is still under age 69, the age at which an RRSP must
be collapsed.
He would obtain a contribution
receipt for the amount of the transfer which would offset the income
inclusion of the designated benefit. The result would be a tax-free
rollover from Ann's RRIF to John's RRSP.
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If there is no surviving spouse and the beneficiary
of the RRIF is a financially dependent child or grandchild, the proceeds
of the RRIF still qualify as a designated benefit. This designated benefit
is taxable in the hands of the child, not the deceased annuitant. The
proceeds of the RRIF could then be used to purchase an annuity that must
end by the time that child reaches the age of 18.
If there is no surviving spouse and the financially dependent child or
grandchild is dependent on the deceased annuitant by reason of physical
or mental infirmity, the amount that qualifies as a designated benefit
may be rolled over into the child's or grandchild's RRSP or RRIF. If there
is no surviving spouse and the children are not financially dependent,
the entire value of the RRIF will be taxable in the deceased annuitant's
terminal return.
Finally, as with RRSPs, if a RRIF annuitant simply names
his or her estate as the beneficiary of the plan, the amount paid from
the RRIF to the estate for the benefit of either the spouse or the financially
dependent child or grandchild can be considered to have been transferred
directly to them. The same treatment outlined in Example six would apply.
As with RRSPs, a joint election between the legal representative of the
estate and the beneficiary must be filed with Canada Customs and Revenue
Agency (CCRA, formerly Revenue Canada).
Getting Advice
Bear in mind that the situations outlined here are simple summaries of
often complex tax scenarios. All cases should be dealt with on an individual
basis, and professional legal and tax advice should always be obtained
when dealing with estates.
This Trimark Taxation Bulletin was prepared with the assistance
of the Chartered Accounting firm of ERNST & YOUNG.
This article was originally written
in 1998 and was updated in March 2001 by Fiscal Agents with amendment
for current capital gains inclusion rates and marginal tax rates.
The information in is article
is subject to change, therefore be advised its content should be viewed
as illustrative to the context of the article. Income tax laws change
over time therein rendering certain numbers quoted obsolete. Please
consult current tax rules or directly at CCRA
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©
, Fiscal Agents Money Management Newsletter
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