November 18, 2014 By: Marcia Green
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Benjamin Franklin said (and I would agree) that there were only two things certain in life: death and taxes. When we are presented with a legitimate opportunity to avoid paying taxes, then we should take advantage of that opportunity if it is advantageous to our overall estate plan.

A beneficiary designation is an opportunity a testator has to name an individual to directly receive their assets. If a beneficiary designation is used, then your estate will potentially avoid having to pay estate administration tax on the value of that particular asset. Estate administration taxes, which were formerly called probate fees, are fees that your estate must pay upon the testator's death. The estate administration tax is collected when an executor makes an application to the Superior Court of Justice for a Certificate of Appointment of Estate Trustee (formally called Letters Probate). Assets that are owned jointly with the testator, or assets that have named beneficiaries, do not form part of the deceased's estate. The idea of reducing the amount of taxes that you will have to pay on your assets should be an incentive to use the beneficiary designations whenever and wherever you can.

Depending on the asset, a beneficiary designation allows certain assets and insurance proceeds to be paid directly to the individual, or individuals, without going through the deceased's estate. Assets that allow for a beneficiary designation are registered retirement savings programs (RRSPs), registered retirement income funds (RRlFs), tax-free savings accounts (TFSAs), life insurance policies and registered educational savings programs (EESPs). Some examples of assets that do not have the ability to have a named beneficiary are chequing or savings bank accounts and Canada Savings Bonds.

RRSPs or RRIFs

One of the unique benefits of an RRSP or RRIF account is your ability to designate how your investments are transferred to your beneficiaries upon your death. The RRSP or RRIF asset can be designated to go to a specific named individual, or it can be designated to form part of your estate and distributed according to the terms of your Will. Regardless of which designation you choose, the Canada Revenue Agency (CRA) deems that your RRSP or RRIF plan was fully deregistered just before your death. As a result, the full fair market value of your RRSP or RRIF at the date of death is included in the income of the deceased for the tax return for the year of death.

If you choose an individual and not your estate as the beneficiary of your RRSP or RRIF, then the RRSP or RRIF assets will automatically rollover or transfer to your beneficiary, but your estate will be responsible for including the RRSP or RRIF asset as income and paying any resulting income tax.

Why is it advantageous to designate your estate as the beneficiary of your RRSP/RRIF assets?

If you designate your estate as your beneficiary upon death, then your RRSP or RRIF assets become part of your estate and the distribution of your RRSP or RRIF assets is determined by the instructions contained in your Will. For estate planning purposes, having your RRSP or RRIF assets distributed through your estate might be advantageous because;

  • you have beneficiaries who are minors;
  • you have beneficiaries that are physically or mentally dependent and require assistance in managing their finances;
  • your Will creates an inter vivos trust that will be funded from your RRSP assets; or
  • your estate will need liquid cash to pay cash bequests that you have made in your Will.

Taxes can be deferred if the beneficiary of the RRSP, RRIF or estate is the surviving spouse or common law partner, is a financially dependent child or grandchild under 18 years old; or is a financially dependent mentally or physically 'infirm' child or grandchild of any age. Even if you designate your estate as the beneficiary of your RRSP, your estate assets will increase, the amount you pay in probate fees might increase, but it will not eliminate the spousal rollover benefits available to your estate.

Designating your spouse or common-law partner as the beneficiary of your RRSP

When you designate your spouse as your beneficiary your spouse has an option to withdraw the RRSP investment and have it transferred into a non-registered taxable environment, or your spouse can elect to transfer your RRSP investment directly into their own registered account.

If your surviving spouse elects to withdraw your RRSP assets and transfer the assets to a non-registered taxable environment, then your spouse will receive the full value of the RRSP investments; your estate will include the RRSP value as income of the deceased for the tax return for the year of death; and your estate will pay any resulting income tax owing.

If your surviving spouse elects to transfer the RRSP asset directly into their RRSP plan, then your RRSP asset will retain their tax deferred character by remaining sheltered within your surviving spouse's registered account.

Designating someone other than your spouse as the beneficiary of your RRSP

When you designate someone other than your spouse as the beneficiary of your RRSP your RRSP investment will transfer directly to that person upon your death. Your RRSP investment is withdrawn from your RRSP and transferred into the name of your beneficiary as a non-registered investment. Your beneficiary receives and holds the transferred investment in a taxable environment. Your RRSP cannot be transferred into your beneficiary's registered tax-free account.

Your estate is responsible for any resulting income tax payable from the transfer to a non-registered account. Because your RRSP assets are withdrawn and transferred directly to your designated beneficiary, they are not included as an asset of your estate and no probate fees are paid.

RRIFs

If you assumed that your RRSP designation would continue to apply when you are converting your RRSP to a RRIF, then that would not be the right assumption. When you are converting your RRSP to a RRIF, you are setting up a new contract and you must designate a beneficiary at that time.

Beneficiary versus successor annuitant

When naming your spouse as beneficiary of your RRIF, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the "successor annuitant" to the RRIF. As a successor annuitant, the surviving spouse will receive the remaining RRIF payments as a new annuitant. The surviving spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected and there Is no need to execute a new contact. If your surviving spouse chooses to receive the RRIF as a lump sum, the deceased's RRIF will be collapsed, causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse.

Designating someone other than your spouse

If a non-dependent child or other person is named as a beneficiary on your RRIF, then the individual will receive the full value of the RRIF tax-free, but your estate will pay the tax on the full value of the RRIF. If the estate does not have enough assets in the estate to pay the taxes, then the CRA will claim the taxes from the amounts payable to the RRIF beneficiaries.

TFSAs

Under a TFSA, the designation of a beneficiary can be made in the following ways:

  • You can designate a specific individual as the beneficiary in the TFSA account documentation;
  • you can name your estate as the TFSA beneficiary in the banking documents and then name your beneficiaries in your Will; or
  • you can leave the designation of a beneficiary blank in the TFSA documents, causing the beneficiary designation to automatically default to your estate.

Similar to RRIFs, when naming your spouse as a beneficiary of your TFSA, you are given the option of having your surviving spouse or common law partner receive the TFSA as a lump sum amount, or choosing your spouse as the "successor holder" to the TFSA. A "successor holder" is a type of beneficiary designation that can only be made provided that the provincial and territorial laws permit this type of designation. According to the CRA, "A successor holder is defined as a surviving spouse or common-law partner that is designated to receive all of the property of a deceased's TFSA account and they receive all of the deceased's TFSA account holder's rights."

Surviving spouse as a successor holder

If you designate your surviving spouse or common-law partner as the successor holder of your TFSA account then:

  • the value of the deceased's TFSA account is not included in their date of death income tax return;
  • the successor holder will become the new holder of the TFSA immediately upon your death;
  • the successor holder will receive your TFSA assets and all earned income up to the date of death sheltered within a TFSA account;
  • all of the earned income after the date of death will remain sheltered within the TFSA;
  • after taking over ownership of the deceased's TFSA, the successor holder can transfer all or a portion of your TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
  • after taking over ownership of the deceased's TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

Designating a beneficiary under your TFSA

You can also designate your children, grandchildren, friend, relative or charity as a beneficiary of your TFSA account. The rules for designating a beneficiary are:

  • the value of the deceased's TFSA account is not included in their date of death income tax returns;
  • the beneficiary will receive the date of death fair market value of the deceased's TFSA account free of any taxes;
  • the beneficiary cannot transfer the deceased's TFSA assets into their own TFSA account;
  • all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer are paid to the beneficiary as taxable income and must be included in the beneficiary's income tax return;
  • beneficiaries can contribute a portion or all of the deceased TFSA assets up to the limit of their own unused TFSA contribution room; and
  • if no beneficiary or successor holder is designated in the TFSA documents or in the deceased's Will, the TFSA assets will be paid to the deceased's estate and disposed of in accordance with their Will.

Beneficiary designations generally kick in immediately after death. Therefore, it is very important that your beneficiary designations reflect your most recent wishes.

RESPs

Registered education retirement savings plans are for the benefit of a child's or grandchild's post-secondary education. The person who contributes to the RESP is called the subscriber. It is possible to create a joint RESP account between you and your spouse so that both of you are named as subscribers to the RESP plan. Joint subscribers are the best scenario because upon the death of one spouse, the surviving spouse can continue the contributions to the RESP and continue the plan for the benefit of the RESP beneficiary.

If there is only a sole subscriber for an RESP then to preserve and continue the RESP, the sole subscriber will have to name a successor subscriber in his or her Will, which should contain a direction to transfer his or her rights as subscriber to a specific person as successor subscriber. The appointed successor subscriber can then, upon the dath of the original subscriber, preserve and continue the RESP pursuant to the Income Tax Act.

If a successor subscriber is not appointed, then it is difficult to arrange for the preservation and continuation of the RESP. In that situation, the RESP plan becomes part of the deceased's estate and does not belong to the RESP beneficiary. As a result, even though it might have been the intention of the deceased that the RESP be preserved and continue to fund the education of the beneficiary, the estate trustee might have no other legal option but to terminate the RESP without specific instructions in the Will, there is no guarantee that an RESP will be kept intact or that the resulting money will be directed to the people it was intended for. Upon termination of the RESP, all contributions will be refunded to the estate of the subscriber, and all Canada Education Savings Grants that have not been paid out as educational assistance payments will have to be refunded to the government.

By appointing a successor subscriber in your Will, you are making a gift to that person of the RESP contribution.

The decision of who to name as your beneficiary is important, and this decision should be made with regard to your overall estate plan. It Is crucial that you make good beneficiary choices. It is equally important that you review the beneficiaries in your RRSPs, RRIFs and TFSA and through your Will from time to time. If you haven't done it in a while, review it sooner rather than later.

Marcia A. Green is an associate lawyer with the Ottawa law firm of Nelligan O'Brien Payne LLP (www.nelligan.ca) and a member of the Wills and Estates Practice Group.

[This article was originally published in the November 2014 edition of Fifty-Five Plus Magazine.]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.