It was Benjamin Franklin who once said that nothing in this world can be certain except death and taxes. When estate planning, we need to pay specific attention to what occurs when these two certainties collide.
Deemed Disposition
At death, for tax purposes, there is what CRA refers to as a ‘deemed disposition’. In other words, when a person dies, it is considered or ‘deemed’ that the person disposed (or sold) all of their capital property immediately before death. It is also deemed that the person received the proceeds of the disposition immediately before their death.
The deemed disposition at death can result in significant taxes owing with respect to a deceased person’s registered retirement savings plan (‘RRSP’) or registered retirement investment fund (‘RRIF’).It is sometimes forgotten that these registered assets are a tax-deferred savings plan and not a tax-free savings plan.
When a person dies owning an RRSP/RRIF, they are deemed to have received the full value of their RRSP/RRIF immediately before death. What this means is that, generally speaking, the full value of the RRSP/RRIF is included in the taxable income of the deceased for the year of their death and, as such, significant taxes are then owing with respect to the RRSP/RRIF. In some circumstances, it is possible to ‘roll over’ an RRSP/RRIF to a beneficiary on a tax-deferred basis. This may include a spouse or adult child with a disability.
Who Pays the Taxes?
Where no rollover is available, however, it is the deceased person’s estate that is responsible for paying the taxes. This is true even where there is a named beneficiary on the RRSP/RRIF. This can have a major effect on an estate plan especially where the person named on the RRSP/RRIF is not the same beneficiary named in the deceased’s Will. The latter is left to bear the tax burden while the RRSP/RRIF beneficiary receives the full value of the RRSP/RRIF. This can result in unintended inequalities between beneficiaries.
When estate planning, it is absolutely imperative that all tax consequences be considered and appropriately planned for.
