A Registered Retirement Savings Plan (RRSP) is one of the most valuable assets many Canadians own. While most people focus on building their retirement savings, it’s equally important to understand what happens to those funds after death.

In most cases, an RRSP does not simply transfer tax-free to your beneficiaries. Depending on who inherits the account, your RRSP may qualify for special rollover provisions that allow taxes to be deferred.

Understanding the rules surrounding an RRSP at death can help you make informed estate planning decisions and ensure more of your savings are passed on to the people you care about.

What Happens to My RRSP When I Die?

When an RRSP holder passes away, the Canada Revenue Agency (CRA) generally considers the fair market value of the RRSP to have been withdrawn immediately before death. This is known as a deemed disposition, meaning the account is treated as though it were cashed out, even if no actual withdrawal occurred.

As a result, the full value of the RRSP is typically included as income on the deceased’s final tax return, often referred to as the terminal return. Because RRSP withdrawals are taxed as income, the value of the account can create a significant tax liability for the estate.

However, there are important exceptions. Depending on who has been named as the RRSP beneficiary, the funds may qualify for a tax-deferred rollover, allowing taxes to be postponed until the beneficiary withdraws the money in the future.

The tax treatment of an RRSP at death ultimately depends on who inherits the account. Whether the beneficiary is a spouse, child, grandchild, or another family member can have a significant impact on how much tax is owed.

RRSP Rollover to a Spouse or Common Law Partner

A spouse or common-law partner is typically the most tax-advantaged RRSP beneficiary. When a spouse is named as the beneficiary, the RRSP can usually be transferred directly into their RRSP, RRIF, or an eligible annuity through an RRSP rollover.

This rollover allows the funds to continue growing on a tax-deferred basis and avoids the immediate tax consequences that would normally arise from the deemed disposition of the RRSP at death. Instead of paying tax when the account holder dies, the surviving spouse will generally pay tax only when they withdraw funds from the inherited account in the future.

In addition to helping preserve retirement savings, an RRSP rollover can simplify the transfer process and reduce the overall tax burden on the deceased’s estate. To take advantage of these rules, the spouse or common-law partner must be properly designated as the RRSP beneficiary.

If no qualifying rollover is available, the RRSP’s value will generally be included as income on the deceased’s final tax return, potentially resulting in a much larger tax bill.

What Happens if a Financially Dependent Child or Grandchild Inherits an RRSP

The CRA provides special tax treatment when an RRSP is inherited by a financially dependent child or grandchild. Depending on the beneficiary’s age and circumstances, some or all of the RRSP proceeds may qualify for a tax-deferred transfer rather than being fully taxed on the deceased’s final return.

Financially Dependent Child or Grandchild With a Disability

If your child or grandchild is financially dependent on you and has a physical or mental disability, they may be able to receive the RRSP through special tax-deferred transfer rules.

Depending on their situation, the funds may be transferred to a Registered Disability Savings Plan (RDSP), an eligible annuity, or another qualifying account. This means the money can continue growing without triggering an immediate tax bill.

Financially Dependent Child or Grandchild Without a Disability

If your child or grandchild relies on you financially but does not have a disability, they may still qualify for special tax treatment. In some cases, the inherited RRSP funds can be transferred to an eligible annuity rather than being fully taxed right away.

This rule is designed to help financially dependent family members receive support while reducing the tax impact that can occur when an RRSP holder dies. Because eligibility requirements can be complex, it’s often a good idea to speak with a tax professional to ensure the transfer is handled correctly.

Non-Dependant RRSP Beneficiaries

What happens if an Adult Child or Grandchild Inherits an RRSP?

If your RRSP is left to an adult child or grandchild who is not financially dependent on you, the tax treatment is much different.

In most cases, the full value of the RRSP is included as income on your final tax return because of the deemed disposition that occurs at death. This means your estate may be responsible for paying tax on the entire value of the account before the inheritance is distributed.

For example, if you leave a $200,000 RRSP to an independent adult child, that $200,000 generally will be added to your income in the year of death. Depending on your overall income and province of residence, this could result in a substantial tax bill for your estate.

While your child or grandchild may receive the RRSP proceeds as the named beneficiary, there are generally no tax-deferred rollover options available unless they qualify as a financially dependent beneficiary. As a result, careful estate planning is important to ensure there are enough assets available to cover any taxes owed.

If you plan to leave a large RRSP to your adult children or grandchildren, it’s worth reviewing your estate plan with a tax professional to better understand the potential tax implications and explore strategies that may help reduce the burden on your estate.

What Happens if Another Relative or Friend Inherits an RRSP?

If you leave your RRSP to a sibling, niece, nephew, friend, or another person, the tax treatment is generally the same as it would be for an independent adult child.

Because these beneficiaries do not qualify for an RRSP rollover, the full value of the RRSP is typically included as income on your final return. While naming a beneficiary can help the funds pass directly to that person and potentially avoid probate fees, it does not eliminate the tax liability associated with the RRSP. In most cases, the taxes are still paid by the estate.

What Happens if No Beneficiary Is Named?

If you do not name a beneficiary on your RRSP, the funds will generally become part of your estate when you pass away.

Like other RRSPs at death, the account is subject to a deemed disposition, meaning the fair market value of the RRSP is typically included as income on your final tax return. Any taxes owing must usually be paid by the estate before the remaining assets can be distributed to your beneficiaries.

Having no named beneficiary can also make the estate administration process more complicated. The RRSP may need to go through probate, which can result in additional fees, delays, and administrative costs depending on your province.

What Happens to a RRIF When You Die?

A Registered Retirement Income Fund (RRIF) is the account many Canadians convert their RRSP into when they retire. While RRIFs are designed to provide retirement income, the rules that apply after death are very similar to those for an RRSP.

When a RRIF holder dies, the fair market value of the RRIF is generally included as income on their final tax return. This means the estate may be required to pay the full value of the account.

However, if a spouse or common-law partner is named as the beneficiary, the RRIF can typically be transferred directly to their RRSP, RRIF, or eligible annuity on a tax-deferred basis. Certain financially dependent children or grandchildren may also qualify for special rollover provisions.

If the RRIF is inherited by an adult child, another relative, a friend, or if no beneficiary is named, the full value of the account will generally be taxable on the deceased’s final return.

Because RRSPs and RRIFs can represent a significant portion of an estate, it’s important to understand how beneficiary designations and rollover rules may affect the amount ultimately passed on to your loved ones.

The same general rules apply to RRIFs. When a RRIF holder dies, the value of the RRIF is generally included on their final tax return unless a spouse, common law partner, or another qualifying beneficiary is eligible for a tax-deferred rollover.

What Happens to a TFSA When You Die?

Unlike an RRSP or RRIF, funds held in a Tax Free Savings Account are generally not subject to income tax when the account holder dies. The value of the TFSA and any investment growth earned up to the date of death can typically be passed on to beneficiaries tax-free.

If a spouse or common-law partner is named as the successor holder, they can take over the TFSA and continue with the tax-free benefits without affecting their own TFSA contribution room. This is often the most tax-efficient way to transfer a TFSA to a surviving spouse.

If a beneficiary is named instead, they can still receive the TFSA proceeds tax-free. However, any investment growth earned after the date of death may become taxable.

Unlike an RRSP or RRIF, the value of a TFSA is generally not included as income on the deceased’s final tax return. This makes TFSA an important estate planning tool for Canadians looking to pass wealth to their loved ones.

Estate Planning With Advanced Tax

What happens to your RRSP when you die depends largely on who inherits the account.  If you have questions about RRSPs, RRIFs, estate planning, or the tax implications of inherited registered accounts, our team at Advanced Tax Services can help.