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Monday, November 29, 2010

Basics of RRSPs

This link goes to an article from Canadian Tax Resource  Blog that gives the ABCs of an RRSP. Something the article doesn't cover that I believe is extremely important is the choice of beneficiary of your RRSP. I'd like to talk about that here as a supplement to the attached article.

When you set up your RRSP, you may name someone to receive the proceeds of your RRSP on your death. The choice of beneficiary affects the tax your estate will pay. As described in the attached article, you don't pay tax on your RRSP until you take the money out. Canadian law says that on your death, your RRSP (and all other assets) are deemed to be cashed out immediately before your death. Therefore the money has been taken out of the RRSP and your estate will have to pay tax on it.

This is where the choice of beneficiary comes in. If you name your spouse as the beneficiary of your estate, on your death your RRSP can roll over to your spouse's RRSP. This means that no tax is payable at the time of your death; the tax is deferred until your spouse dies or takes out the money. This is a popular arrangement for married and common law couples as it provides the best tax advantage.

If you name someone else as the beneficiary, or you name your estate, on your death, your estate will have to pay the tax on your RRSP.

When choosing your beneficiary, remember to keep the big picture of your estate in mind. It can be a mistake to take individual asset - RRSP, house, bank accounts - and deal with each separately. Try to envision your estate as a whole so that you can see the effect of how everything works together. This is something an estate planning lawyer can help you do.

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