What happens to my RRSP or RRIF when I die?
Unless it passes to a qualifying beneficiary, the full fair market value of your RRSP or RRIF on the date of death is deemed to be received as income on your final tax return. This can push the estate into the top marginal bracket, so a large registered plan can lose 40-53% to combined federal and provincial tax.
How can I reduce tax on my RRSP at death?
Name your spouse or common-law partner as beneficiary so the plan rolls over tax-deferred to their RRSP/RRIF. Amounts can also roll to a financially dependent child or grandchild, or (tax-deferred) to a dependent disabled child's RDSP or annuity. Otherwise, drawing down the plan gradually in lower-income years reduces the death-year spike.
Is the RRSP rollover to a spouse automatic?
No. The spouse must be named as beneficiary (or the estate must make a joint election), and the funds must be transferred to the survivor's registered plan by the deadline. Simply leaving the RRSP to the estate without the election means the full amount is taxed on the deceased's final return.
Who pays the tax on an RRSP left to a non-spouse?
The tax is generally a debt of the deceased's estate and is paid from the estate, even though the RRSP may pass directly to a named beneficiary. This can create unfairness where one person receives the RRSP tax-free while other beneficiaries bear the tax, a common source of estate disputes.