Heads up: this article isn’t applicable to residents of Quebec, where provincial law governs how assets are distributed.
People have done any number of things with their assets when they die.
In 1926, a millionaire named Charles Vance Millar passed away. With no obvious successor, he decided to get one last laugh from the grave, leaving his vacation home to be shared among three lawyers who couldn’t stand each other, and shares of a brewery to prohibition-supporting ministers.
We’ve all heard succession stories with a less comedic twinge if only in Hollywood movies. A young new spouse gets everything while the deceased’s adult kids are left high and dry. Or a long-lost family member emerges from the woodwork to claim the proceeds, pushing out those who were closest to the deceased.
But for most people, the goal is to ensure that their loved ones get the maximum value of any assets left behind. And if you hold registered investment accounts in Canada, the best way to ensure that your money ends up in the right hands is to name a beneficiary or successor.
But wait… isn’t that why I have a will?
Wills are an important part of planning your estate, but the assets passed along through a will are typically subject to a provincial tax called a probate fee. Additionally, if wills aren’t kept up to date following a major life change—such as a marriage or the birth of a child—certain provinces may render them invalid.
When a successor or beneficiary is named on a registered account, these assets can be passed along to the recipient directly rather than funnelled through the estate. This expedites the distribution of your investment assets and can result in significant tax savings.
In this article, we’ll explore the best options for naming a beneficiary or successor to a given account.
Naming a beneficiary: RRSPs, TFSAs & RRIFs
When it comes to registered accounts, the term “beneficiary” refers to someone who will receive the funds from a specified account. Because of tax implications, the value passed along can differ depending on the type of account and the relationship between the beneficiary and the account holder.
One quick note about the information below: different rules apply to any increase in account value after the date of the account holder’s death, at which point taxable income may be attributed to the beneficiaries.
Here’s a breakdown of how RRSPs are passed to the beneficiary:
- Spouse or common–law partner: Assets are transferred to the spouse’s RRSP as a tax-deferred rollover and do not affect the beneficiary’s contribution room. Additionally, there are no probate fees paid on the balance of the RRSP.
- Non-spouse: The balance of the account is transferred to the beneficiary tax-free as income taxes are paid via the deceased’s final tax return. Probate fees will not be paid on the balance of the RRSP.
- Estate as beneficiary: The estate can be named as a beneficiary, or if no beneficiary is chosen, the estate will receive the funds by default. Assets will be disbursed according to instructions in the will, with the deceased account holder paying the income taxes owing. Keep in mind that all assets in the estate can be subject to probate fees.
TFSAs and RRIFs
TFSAs and RRIFs have the option to name a successor or a beneficiary.
- Spouse or common-law partner: Spouses should be named as the successor on these accounts. We’ll go over why in the section below. You also have the option to add a contingent beneficiary who would be next in line to receive the funds. We recommend any complex instructions like this be specified in your will to avoid complications.
- Non-spouse: When these accounts are passed to a non-spouse beneficiary, the balance doesn’t incur any probate fee, however it is subject to income tax.
- Estate as beneficiary: If the estate is the beneficiary, the handover conditions are exactly the same as outlined in the case of an RRSP.
Naming a successor: TFSAs and RRIFs
In addition to a beneficiary, TFSAs and RRIFs have the option to name a successor. This is the best way to transition the funds from a tax perspective, however only a spouse or common-law partner can be named as a successor.
In this case, the account balance rolls over directly or the account ownership can be transferred without incurring any tax or probate fees. The rollover doesn’t affect the spouse’s contribution room.
You’ll see the term “Successor Annuitant” used on legal documents related to RRIFs and “Successor Holder” for those related to TFSAs. Both of these designations behave similarly.
When it’s not possible to name a successor or beneficiary: non-registered accounts
It’s not possible to name a successor or beneficiary on a non-registered account. There are a few ways to transition these accounts that minimize fees and taxes.
If an account is structured as a joint account with right of survivorship, the co-account holder maintains the funds without paying probate fees, but there are several tax and legal consequences to this structure. For starters, the CRA will look at whether the account was only structured as joint to avoid probate fees. The co-account holder can also run into complications when it comes to reporting investment income and attribution of capital gains. You’ll want to talk to a professional to fully understand this structure.
Alternatively, investments can be transferred at a cost to a surviving spouse or common-law partner to avoid triggering immediate capital gains tax.
A third option is to purchase an insurance policy. Death benefits paid from an insurance policy are tax-free to the beneficiary and don’t make up part of the deceased’s estate.
Finally, to ensure non-registered funds are transferred according to your wishes, you’ll want to have a will in place.
Experts in Financial Planning
Decisions around naming successors and beneficiaries will have an impact on your legacy. It’s a good idea to work with a financial adviser to plan your estate.
Terms to Know:
Beneficiary: A person who receives proceeds or an asset.
Estate: All of the cumulated assets owned by a person at death.
Executor: A person named in a will who ensures assets in an estate are distributed according to instructions.
Intestate: This is a term used when a person dies without a will.
Probate: A process in which the court reviews a will to ensure it is current, valid, and legitimate.
Successor: With regards to registered accounts, a successor is the surviving spouse or common-law partner who will receive the asset.
Will: A will is a document specifying how all assets in an estate are to be distributed following the death of an individual.