Deciding who and how you name a beneficiary could have tax and estate implications. Beneficiaries can be designated when opening investment accounts such as RRSPs, RRIFs, TFSAs, RESPs, etc…or the accounts and allocations can be listed in a will. It is important to know what the financial implications will be involved to minimize the taxes payable in the designation of beneficiary and ensure the final wishes are followed after the account holder’s death.
Registered Retirement Accounts
Registered Retirement Accounts such as RRSP (Registered Retirement Savings Plan), RRIF (Registered Retirement Income Funds), and DCPP (Defined Contribution Pension Plans) can all have beneficiaries named to receive funds after the account holder’s death.
Naming only one beneficiary - If this beneficiary dies before you, a judge may have to decide how your assets (in an RRSP, RRIF, etc.) get distributed. Naming a contingent beneficiary, or if you intend to split the benefit to two or more beneficiaries, can reduce this risk.1 The alternative is to list the beneficiaries of your accounts in a will.
Type of beneficiary:
| Spouse or Common-Law Partner - is the most common beneficiary | ||
| If beneficiary is listed on the Registered Retirement Account | RRA beneficiary specifically listed in the will | RRA beneficiary not list in a will |
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The spouse can transfer the amount to their own registered account and the tax-deferred funds will remain tax sheltered. |
If the spouse is listed as the main beneficiary in the will they may still be able to transfer the amount to their account on a tax-deferred basis. |
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| Children or Non-Spouse | |
| If beneficiary is listed on the Registered Retirement Account | RRA beneficiary specifically listed in a will |
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The account funds will be distributed quickly without probate fees or estate administration tax. |
Funds will take longer to distribute and will incur probate fees and estate administration tax. The funds will be held up in the estate process. |
| The division of assets can be specified and assigned if a beneficiary dies prematurely. Ex: the parent’s portion is given to their children | |
| Tax is paid by the estate of the deceased on the market value of the account at the time of death. | |
| The power of attorney cannot change your beneficiary choice. | |
| Dependent Children or Grandchildren | |||
| If beneficiary is listed on the Registered Retirement Account | RRA beneficiary specifically listed in a will | ||
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Funds will take longer to distribute and will incur probate fees and estate administration tax. The funds will be held up in the estate process. | ||
| The division of assets can be specified and assigned if a beneficiary dies prematurely. Ex: the parent’s portion is given to their children | |||
| The power of attorney cannot change your beneficiary choice. | |||
| Disabled Children or Grandchildren | |||
| If beneficiary is listed on the Registered Retirement Account | RRA beneficiary specifically listed in a will | ||
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Funds will take longer to distribute and will incur probate fees and estate administration tax. The funds will be held up in the estate process. | ||
| The division of assets can be specified and assigned if a beneficiary dies prematurely. Ex: the parent’s portion is given to their children | |||
| The power of attorney cannot change your beneficiary choice. | |||
Advantage of listing a beneficiary on your Registered Retirement accounts
- the account funds will be distributed quickly without probate fees or estate administration tax.
- Privacy - When your assets pass through your estate (will) the information becomes public knowledge. When your beneficiary is listed on your income account, "the assets in that account avoid your estate and go directly to the beneficiary. They’re kept private and no one knows the details."5
Advantage of listing a beneficiary on a will
- you can specify in detail how your assets will be distributed should a beneficiary die prematurely or other situations. Ex: the parent's portion is given to their children, funds not given to ex-husband or wife if the beneficiary remarries.
TFSA (Tax-free savings account)
TFSAs can have a beneficiary and/or a successor holder.
Successor holder: Only your spouse or common-law partner, as defined in the Income Tax Act (Canada), can be a successor holder. In the event of your death, the name on the Account is changed to the name of the successor holder, who will continue to hold and operate the Account as their own.2
Listing your spouse or common-law partner as the successor holder will allow them to take over the a TFSA account upon your death without impacting their own TFSA room or any potential tax implications. "A successor holder would receive the account with the money inside it. A successor holder would get to keep all that tax-free room. The TFSA is now theirs. If they make a withdrawal they would get that contribution room back the next year."5
The best way to describe the difference between a beneficiary and a successor holder is that a beneficiary would get the money, but a successor holder would get the account.5
Naming your spouse or common-law partner as beneficiary instead of successor holder: They can still roll the amount from your TFSA account to theirs without impacting their TFSA room by Dec. 31 of the year following death, in essence becoming a successor holder. However, the tax-exempt amount is only up to the fair market value of the TFSA account at the date of death. "Unless the beneficiary has TFSA contribution room available they will start to be taxed on any investment gains going forward."5
It is best to review your designated beneficiaries when your situation or the beneficiary's situation changes. ex: before or after retirement. The advantages of being named a successor holder or beneficiary can also change. Getting the advice of a financial adviser/planner or tax lawyer may be valuable as well.
A non-spouse beneficiary of a TFSA will receive their inheritance fairly quickly after showing a copy of the death certificate to the financial institution. The amount can be added to the beneficiary’s TFSA if they have TFSA room. The income earned between the date of death and the date of transfer is taxable, and paid by the beneficiary.
Naming a beneficiary for TFSA funds in a will ensures that the distribution of funds based on the terms of the will are followed. The TFSA value is transferred to the estate tax free. However, any income generated after the date of death is taxable.
RESP (Registered Education Savings Plans)
An RESP is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries. 3
The beneficiary (future student) does not automatically receive the money aimed at their education, when the subscriber dies.
The RESP account is still owned by the subscriber. It is advisable to assign a joint subscriber or successor subscriber, so the new subscriber will take over the RESP account when the original subscriber dies.
A clause can be added to your will to appoint a successor subscriber of the RESP account.
In the absence of naming a joint subscriber or successor subscriber in a will or RESP account will risk having the funds become taxable, withdrawal of government grants (contributions), and being subject to probate fees.
Other accounts
Non-registered investment accounts – do not have designated beneficiaries, however, the accounts can pass directly to a joint account holder or be dealt with in a will. Capital gains can only be deferred if the account passes to a spouse.
The general rule for non-registered assets is that a taxpayer is deemed to have disposed of all his or her property, such as stocks, bonds, mutual funds and real estate immediately before death at their fair market value (FMV). When the Fair Market Value exceeds the property’s adjusted cost base (ACB) (or acquisition cost), the result is a capital gain, half of which is taxable to the deceased and must be reported in the deceased’s final tax return, known as the “terminal return.” 4
Formal or Informal Trust accounts – are established for beneficiaries and held by a trustee. Ex: if the beneficiary is a child, the money can be held in trust until a designated age.
If the trustee dies, a joint trustee would continue or another trustee may be appointed in the case of having only one trustee. The terms of the trust deed would continue.
GIAs (Guaranteed Interest Annuities: sold by insurance companies. They are similar to GICs (Guaranteed Investment Certificates) but are structured as life insurance contracts. They have designated beneficiaries who receive money quickly and efficiently after death. Therefore, the money received is not affected by estate administration or probate fees.
Beneficiary: a person who derives advantage from something, especially a trust, will, or life insurance policy.
Subscriber: the person or group who initiates the RESP account. The subscriber can be a parent, spouse, common-law partner, a public primary caregiver etc.
Promoter: the organization that creates the RESP ex: bank
The beneficiary of an RESP: is the future student(s)
2 https://www.td.com/ca/document/PDF/forms/529214.pdf#:~:text=Successor%20holder%3A%20Only%20your%20spouse%20or%20common-law%20partner%2C,hold%20and%20operate%20the%20Account%20as%20their%20own
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