Generally, you can designate a beneficiary for your RRSPs.
If you do, generally the RRSP will be paid to your designated beneficiary on your passing. The RRSP will not form part of your Estate and, therefore, not be subject to Ontario’s estate administration tax.
However, the problem: the federal Income Tax Act provides that, even though the RRSP will pass to your designated beneficiary (outside of your Estate), tax will be payable by your Estate on those funds as of your death (as if you had withdrawn those funds). This can create a burden on your Estate and its beneficiaries, which they may perceive as unfair. In other words, your designated beneficiary gets the RRSP funds, but not the corresponding tax burden created by the Income Tax Act on your death.
This often causes litigation, which you were likely trying to avoid in your Estate plan.
Careful estate planning is important, including considering potential tax issues that can arise on your death.
There are some ways to potentially avoid this, such as:
1. Having an insurance policy, payable to your estate, for example, that will pay the tax burden on the RRSPs that you designate to someone on your death;
2. Rolling over your RRSPs to your spouse or a dependent child, if you meet the specific requirements of the Income Tax Act to do so (consultation with an accountant or tax-experienced lawyer would be helpful); and/or
3. Designate your Estate as the beneficiary of your RRSPs – although this will mean estate administration tax is likely payable on those funds, that is likely less of a financial burden to your beneficiaries than the alternative. The Estate can receive and pay the tax on the RRSP on your death using this approach. You can even specify in your estate plan that the net amount is payable to a specific person, such as the person you could have designated as your beneficiary on the RRSP.
Estate planning is important. To avoid unintended results and possibly creating conflict among your family member beneficiaries, creating your plan with a good, qualified estate planning lawyer is well worth the modest investment.