One area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). When you open an RRSP or RRIF, you are opening a special contract under the Income Tax Act. It requires you to designate one or more beneficiaries.

This is often done casually and without a lot of thought. As your circumstances change through marriage, divorce or children, you should consider reviewing your beneficiaries to make sure you have the right people designated.

Taxation of the RRSPs/RRIFs at death

The first place to start when deciding on a beneficiary is to understand how these contracts are taxed at death.

The general rule for an RRSP or RRIF is that the value of the RRSP or RRIF at the time of death is included in the income of the deceased on the tax return for the year of death. Three exceptions to this rule, where the tax can be deferred if the beneficiary of the RRSP, RRIF or estate, are:

• The spouse (includes common-law partner).
• Financially dependent child or grandchild under 18 years of age.
• Financially dependent mentally or physically infirm child or grandchild of any age.

Who should be the beneficiary?

There are obvious tax benefits to naming your spouse, dependent children/grandchildren under the age of 18 or dependent adult children who are mentally or physically infirm as your beneficiary, but really anyone can be named.

RRIFs and beneficiary designations

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. Don't assume the RRSP designation continues to apply.

Successor annuitant for RRIFs

When naming your spouse as a beneficiary, 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.

If a successor annuitant election is not made, 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. This has several disadvantages. It may not be a good time to sell the RRIF investments and there are selling costs to consider. The surviving spouse would also have to prepare all of the paperwork at a difficult and stressful time.

The successor annuitant designation is effortless. The 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 by this, as there is no need to execute a new contract.

Probate fees

If a beneficiary is designated in the RRIF contract, the RRIF value will not be included in the calculation of probate fees on death. While probate fees are not as significant as income taxes, such a simple step will ensure that more is available to your beneficiaries.

Charitable donations

The most significant changes affecting estate planning relates to the ability to receive a credit of up to 100% of taxable income for donations made through a will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his or her will.

This is a great opportunity for individuals to donate money to their favourite charity that would have otherwise gone to the government in the form of taxes.

Yours truly,

Tactical Asset Management, Inc.
phone: (306) 757-2121
fax: (306) 347-3655
e-mail: inquiry@tacticalassetmgmt.com
website: www.tacticalassetmgmt.com