October 3, 2023

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In all provinces except Quebec, you can name your beneficiary directly in a registered account. In Quebec, a beneficiary can only be named in a will.

Let’s review who can be a beneficiary of your RRIF account and the tax implications based on their relationship with you.

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What is RRIF?

From Moneysense Glossary:

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A registered retirement income fund (RRIF) is an account designed to hold investments transferred from registered retirement savings plans (RRSPs) and certain other registered accounts. Canadians must close their RRSPs by the end of the year in which they turn 71.

Investing in a RRIF from an RRSP avoids the need to sell investments in a registered account and pay tax on any capital gains. After opening the RRIF, you need to withdraw a certain percentage of the balance every year as per your age.

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Instead of converting RRSP to RRIF, you also have the option of redeeming your RRSP or buying an annuity.

Who can be a beneficiary of RRIF?

You have a few options as to who can benefit from your RRIF account, Bob, which provides options for your estate planning using beneficiary designations in registered accounts.

Married or common-law partner: If you want your RRIF to go to your spouse or common-law partner, you have the option of naming them as beneficiaries, or you can name them as heirs to the account , which means they will handle the actual RRIF account. A successor annuitant can only be a spouse or common law partner. If your spouse has already passed away, this is not a substitute for any other beneficiary you may be considering. Financially Dependent Children or Grandchildren: These are children or grandchildren who depend on you for financial support. An example of a dependent child/grandchild is a minor who lives with you and cannot earn their own income, or an adult child with a disability. Someone who is not financially dependent on you: this could be a family member, a friend or even a charity. You might also consider naming multiple beneficiaries from these different categories, for example, a dependent child and a non-dependent child as beneficiaries on the account. However, professional advice is recommended to ensure that you understand the best approach to tax situations for everyone involved. No Beneficiary Designation: This means the assets will be redeemed and flow through your estate and follow the instructions in your will. If there was no will, the property would be distributed according to the Succession Law Reform Act (this applies to Ontario; each province and territory has its own law).

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Each of these options has different tax implications for your estate and the person or people receiving the RRIF. Let’s take a look at them.

Tax Implications for RRIFs

What happens to your RRIF when you die, and how your estate will be affected, depends on who you name as a beneficiary. Let us compare the tax implications for the situations mentioned above.

Married or common-law partner: As heir, your spouse or common-law partner will become the owner of your RRIF account upon your death. The property has no tax consequences because the value of the RRIF is not reported on your final tax return (also known as a terminal return). The successor annuitant has a few options: They can transfer the assets to their own RRIF (or RRSP, if they’re under age 72). Or they can keep the account as is, receive the RRIF income, as applicable, and report this income on their tax return each year. Financially Dependent Children or Grandchildren: The RRIF assets will be transferred to these beneficiaries, and your account will then be closed. The estate does not need to include the value of the RRIF on your final tax return or pay income tax on it. The assets of the RRIF will be transferred to the beneficiary’s own registered account such as RDSP, and the beneficiary will be able to defer the tax. Someone who is not financially dependent on you: The beneficiary will receive the assets in the RRIF, and then your account will be closed. The key difference here is that the value of your RRIF will be included on your final tax return, and your estate will pay income tax. This can be a source of contention if the estate pays taxes for the estate which becomes completely tax-free, leaving little for the beneficiaries of the estate. If your RRIF beneficiary is a charity, however, there can be a significant tax benefit, as the estate will receive a tax credit for the donation, which can reduce or effectively eliminate taxes on the RRIF value declared on your final tax return. . Beneficiary Designation: The full value of the RRIF will be included in the final tax return and the estate will pay taxes owed.

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And if you want to split your RRIF between a variety of beneficiaries, it’s best to seek advice from a financial professional, as the tax breakdown can be very complex.

Seek RRIF advice from a financial planner

As you can see, Bob, you have a variety of options for naming beneficiaries in your RRIF account, depending on your situation. Given that you have named your three adult children, and assuming that they are not financially dependent on you, this means that they will receive the property on a tax-free basis; However, your estate will pay taxes on your final return.

As with all aspects of the estate planning process, Bob, it is wise to consult with a professional who can review your overall financial situation and inform you of all the tax implications of your beneficiary designations and choices. A certified financial planner is an excellent resource for information on registered accounts. They can guide you through the best options for your situation.

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