1. RRSP’s Tax on Death
Alex, age 68, was recently diagnosedwith a rare heart disease which doctorspredictedwould
shorten his life. Upon hearing the news, Alex decidedit was time to reviewhis estate plan
with a view towards transitioning his assets to his kids, Carl (42)and Pete (38). Since
becoming a widower severalyearsago, Alex has liveda modest life, accumulating the bulk of
his assets in an RRSP worth approximately $410,000. Alex’sonly other asset was a non-
registeredmutual fund account totaling $105,000.
In reviewing his estate plan, recognizing Pete’sfinancial challenges, Alex decidedthat he
wanted to leave his $410,000 RRSP to Pete and took the necessary steps to ensure that Pete
was named sole beneficiary onhis RRSP contract.
Wanting to leave assets for Carl as well, Alex named Carl executor and sole beneficiary of his
estate with the intention of leavinghis non-registered investment account to Carl at death.
Shortly after revisinghis estate plan, Alex died. Did Alex achieve his objective of leavingthe
bulk of his assets to Pete while, at the same time, ensuring the availability of an inheritance
for Carl?
In Alex’scase, since his RRSP had a value of $410,000 at the time of his death, there was an
income inclusion of $410,000 onAlex’sfinal tax return. Because his RRSP beneficiary (Pete)
was not a qualified beneficiary, there was no opportunity for atax-deferredrollover. Asthe
majority of Alex’sincome inclusion was subject to tax at 46%, a tax liability of approximately
$188,000 in respect of the RRSP resulted. Alex’sestate was responsible for funding this
liability to the fullest extent possible – eventhough it meant the elimination of Carl’s
inheritance. Because the value of Alex’sestate at the time of death was $105,000, and
because all debts (including income tax) must be paid before any excessis paid to
beneficiariesof a deceased’sestate, the full value of Alex’sestate ($105,000)wasused to fund
the tax liability of his RRSP and other income in the year of death, reducingCarl’s
inheritance to zero.