How is my RRSP or RRIF taxed when I die? - guest blog

I'm pleased to let you all know that today two of my colleagues at Scotia Private Client Group have agreed to post an entry to this blog to share their knowledge of investments. Twin brothers Paul Roberts and David Roberts (a.k.a The Roberts Team) are Senior Wealth Advisors and portfolio managers with Scotia McLeod in Edmonton. Check them out at http://www.davidandpaulroberts.com/.

Here's what they have to say about taxation of RRSPs and RRIFs:

"Upon death, the full market value of registered assets (RRSPs and RRIFs) is included as income on your final tax return. This can result in a significant tax bill as the proceeds will be taxed at your marginal (highest) tax rate. An individual who has a $500,000 registered account may have to pay taxes as high as $232,050 if resident in Ontario or $195,000 if resident in Alberta. However, there are a few situations where this tax may be deferred or possibly reduced.

Registered assets can be rolled over to a spouse or common law partner's RRSP or RRIF tax-free. Registered assets may also be passed on to a financially dependent child or grandchild provided you have named them the beneficiary of your registered account. A child that is under 18 is able to receive an income-producing annuity that pays the full amount up until the child is 18. If the child is dependent on you by reason of physical or mental infirmity then the registered account may be rolled over tax-free into the disabled child's own registered account.

Care should be taken when you select the beneficiary or beneficiaries of your registered account. If you name a beneficiary that does not qualify for one of the preferential tax treatments listed above, then it could cause some problems for other beneficiaries of your estate. An example may be naming your brother as the beneficiary of your RRSP and your children as the beneficiaries of the balance of your estate. In this example, the brother would receive the full RRSP assets and the tax bill would have to be paid by the estate, reducing the amount your children would receive.

You should discuss all estate settlement issues with your legal advisors and financial institution to obtain a complete understanding."