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In Case of Death
You are entitled to designate a beneficiary for your RSP. This beneficiary may be a person, your estate or a registered charity.
The designation can be conveniently made on the RSP contract form, if your province recognizes that, or in your will. If you die without designating a beneficiary, the RSP will be closed, its full value will be paid to your estate and that amount will be taxed as part of your final year’s income. Recent years have seen several major changes in the RSP beneficiary rules. The table below summarizes your options. If you have a spouse, your will should also authorize your executor(s) to make two other payments to his or her RSP:
- A spousal RSP contribution if you have not used up your contribution limit. This must be done within 60 days of the end of the year of death, and will be deductible on your final return.
- A non-deductible overcontribution to the extent that you have not used your cumulative $2,000 overcontribution cushion. Since there is no tax deduction, this is advisable only if your spouse can let the money remain tax-sheltered long enough to more than offset the tax due when it is withdrawn from his or her RSP.
Some older people buy life insurance to replace the income tax due on their RSP or RIF at death. That maximizes the estate left to their heirs. Your National Bank Financial Investment Advisor can help arrange such coverage through our exclusive insurance brokerage, NBF Financial Services. Due to the way that insurance is priced, this can often work well for couples who buy a policy that pays off only on the second death. Whether it’s worthwhile for a single person will depend on his or her specific situation. Ideally, the heirs should pay the insurance premiums since they will be the ones to benefit.
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Summary of your Options
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Beneficiary option
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Considerations
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Your estate
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This designation provides the most flexibility, but only if your will authorizes your executor(s) to do any allowable transfers, considering tax efficiency and need. They would file income tax form T2019.
This lets them assess your tax position and optimize the use of tax-free transfers and taxable payouts. Be aware that your province may levy probate fees when the money is paid to your estate. Those fees, however, may prove minor in comparison to the potential tax savings for your family members.
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Your spouse, married or common-law
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This is the most common designation. The money can be transferred tax-free to your spouse’s RSP or RIF, or be used to buy an eligible annuity in his or her name.
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Dependent children and/or dependent grandchildren
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If the beneficiary is physically and mentally healthy, your RSP money can be used, tax-free, to buy an annuity that pays regular income until the child turns 18. Each annuity payment will then be taxable for the child. If the beneficiary is physically or mentally infirm, your RSP money can be used to support the child for life. It can be moved to an RSP in the child’s name. Or, it can be used to buy a life annuity for the child or a fixed-term annuity that makes payments until age 90. In each case, tax applies to the child’s periodic income, not the initial transfer. Before the 1999 federal budget, this option was available only if there was no surviving spouse.
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Registered charities
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Your RSP’s value can be paid, tax-free, to the named organization(s). Your estate would face tax on that withdrawal, but gets an offsetting charitable donation tax credit. This direct designation was provided for in the 2000 federal budget.
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