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Wednesday, January 29, 2020

Calgary widow forced to pay $270,000 to CRA over beneficiary oversight

Sometimes when I meet with clients to prepare their wills, they tell me they are not really sure who they have named as beneficiaries on certain assets. Specifically, they are not always positive who has been named on their RRSP or RRIF. Does it matter? Oh, yes it does, and this story will show you exactly why it's so important.

Jim Phillips passed away, leaving his widow, Donna, surviving him. Jim was 74 when he passed away. At age 71 he had switched his RRSP to a RRIF, as we are required by law to do. Jim had named Donna as the beneficiary of his RRSP but somehow the beneficiary designation did not make it onto the RRIF.

This means that when Jim passed away, his RRIF was fully taxable. If he had named Donna as the beneficiary, there would have been no tax payable, as the tax would have been deferred until Donna passed away or withdrew the money. The tax was $270,000 and it was on Donna as the recipient of Jim's estate to pay it.

To read more about this story from CTV news, click here.

Donna believes the lack of beneficiary designation on the RRIF to be a mistake, and it seems she is probably right. There is no logical reason that Jim would have discontinued that designation. At this point, it isn't clear whether the financial advisor who switched over the RRSP made a mistake, or how the error occurred.

What is clear is that each and every one of us should check our own beneficiary designations on RRSPs, RRIFs, TFSAs, LIRAs and life insurance policies to make sure we don't leave our families with financial problems to deal with after our passing.


2 comments:

  1. It appears the issue is the type of document used to name the beneficiary to the RRIF.

    Assuming Donna is the only beneficiary to Jim's estate, then no one will benefit from RIFF funds being cashed-in for transfer to the the general estate. As such, I anticipate Donna would have valid reason to challenge CRA that the estate should not be required to submit an immediate tax payment since Jim's will actually appointed her as beneficiary to the RIFF as his spouse and only beneficiary to his estate.

    It appears Donna expected to roll the entire RIFF into her RRSP without incurring an immediate tax penalty to the estate, which could occur only with the surviving spouse being the only beneficiary of the RRIF.

    Since an RRSP and RIFF funds are only tax deferred, tax will be paid on those funds either when withdrawn by Donna, or when she or a subsequent spouse eventually passes away.

    As tax will be paid on those funds at some point in the future, there will be no loss to CRA in permitting a tax deferred rollover to the surviving widow and only beneficiary to the RRIF. This will allow her RRSP/RRIF to increase in value likely greater than her remaining annual personal contribution limits, allowing her fund to earn additional investment income which will result in further taxes to be eventually owing.

    Mark

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    Replies
    1. It appears from the story that Donna has been trying to raise funds in various ways to pay the tax hit. I don't know what steps she has taken to argue her position so far, but I agree that she has a decent chance of success on a challenge to CRA.

      Lynne

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