When you die, the taxman treats the fair market value of your RRSP as income, which is subject to tax at your marginal tax rate. That means that if you have $200,000 in your RRSP and you die Canada Revenue considers this $200,000 to be income in the year you die and will send your estate a tax bill of approximately $70,000 to $80,000.  Your estate can avoid that tax bill if you pick the right beneficiary. Certain beneficiaries, known as qualified beneficiaries will be able to receive the funds from your RRSP without anyone paying tax upon your death. Having a qualified beneficiary for your RRSP means you can avoid a big tax bill on the value of your RRSP when you die. Who is a qualified beneficiary?  It can be your spouse; common-law partner; financially dependent child or grandchild who is dependent because of a physical or mental infirmity or a financially dependent child or grandchild under the age of 18.

A qualified beneficiary can have the value of the deceased’s RRSP transferred directly to the qualified beneficiary’s own RRSP where the money can remain tax sheltered until it is eventually withdrawn. In the case of a minor child under age 18 the funds can be placed in a special annuity which would pay the funds out evenly over the years remaining before the child turns 18. This lowers the eventual tax bill by having the income spread out over several years at a lower rate rather than being hit all in one year at a higher rate. We should add that one should always seek professional advice before designating a minor child as a beneficiary.

Choose the right beneficiary and save your estate a lot of tax dollars.

RRSP Deadline is March 3, 2014