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Monday, May 24, 2021

No tax benefit on a RRSP/RRIF rollover if the beneficiary dies before receiving funds

A recent article in the Financial Post talked about how RRSPs and RRIFs are taxed upon the death of the owner. This is something that I discuss with the majority of my clients, as we make sure to discuss beneficiary designations, joint property, and a dozen other things as we plan their wills. To read the article, click here.

The Financial Post article contained a really good explanation of how the tax works and how you can avoid taxation of your RRSP or RRIF by naming certain beneficiaries (that is, your spouse or disabled child). Most of this information will be familiar to those of you who are in the process of thinking about how your estate will eventually be distributed. But the article also talked about something new that has been confirmed by CRA: the beneficiary of the RRSP or RRIF must be alive to receive the funds (i.e. cannot be paid to his or her estate without tax consequences).

The case that led to the technical interpretation arose when the owner of an RRSP died. He left the RRSP to his wife, which normally would mean that she would receive the funds in a rollover to her own RRSP, and there would be no tax to the husband/owner of the RRSP. However, the wife died before she received the RRSP money. It didn't get paid until the year after she died. So the question was whether the husband/owner of the RRSP had to pay the tax on the funds or not.

According to the technical interpretation by the CRA, the husband/owner did have to pay the tax. There was no rollover because the designated beneficiary died before she actually received the money. 

In a case such as the one described here, the payment of the RRSP or RRIF would probably not have been handled by the executor of the husband's estate. Typically, the beneficiary (wife) would deal directly with the bank, since the RRSP/RRIF would not pass through the husband's estate. But you can see how the husband's estate, and therefore his executor, would be directly affected by the wife's estate in this case. The husband's estate would be on the hook for the tax on the RRSP or RRIF if the rollover did not take place. What a nightmare!

So what can we learn from this case? First of all, if you are the beneficiary of an RRSP or RRIF, or you represent a beneficiary, perhaps through an Enduring Power of Attorney or Adult Guardianship, don't waste time. Work with the bank to get the funds moved in a timely manner.

Secondly, if you're an executor, it's a good idea to request a Tax Clearance Certificate from CRA so that you know you're free of tax tangles before you distribute the estate.


  1. Secondly, if you're an executor, it's a good idea to request a Tax Clearance Certificate from CRA so that you know you're free of tax tangles before you distribute the estate.[...]

    Interesting. I thought the Tax Clearance Certificate from CRA was obtained AFTER the Estate was wound up by the Executor. None of the lawyers that I have been involved with ever brought that to my attention. Dumbfounded in the Niagara Region.

    1. Webeye, you do have to have the estate substantially completed before applying for the final tax certificate (there can be interim ones along the way). You have to have sold the real estate (to trigger potential gains/losses) and to have cashed in things that need to be converted. However, it is quite common that the estate, all out of the deceased's name and sitting in the name of the estate, is held safely by the executor until a clearance certificate is received.

      If an estate is distributed before the tax certificate is received, an executor should always hold back enough money to pay any future tax and keep enough of a cushion to deal with surprises.

      So, to the point that lawyers have told you the estate needs to be wound up - well, that is only true in a superficial sense. The bulk of the estate work has to be wound up for sure, but not the distribution.


  2. Lynne,
    Thank you so much for that response. I am dealing with a 15 year headache and mess. I have contacted CRA for a Certificate and I will alert them as to what is going on, and what has gone on. This Estate matter is currently at a higher level...LSUC.
    1)the estate substantially completed [LB]- It is not. The Property remains unsold. A Sibling resides in the Estate Home and is also withholding a number of GIC's that belong to the Estate. Probate is not completed on those Funds. If correct, Probate Tax will have to be paid on the final Property Appraisal. Probate Tax was paid 15 years ago on the property (appraisal) and cash that was in the Estate Bank Account. There are no funds left in the Estate Account. A great deal of the funds from the Estate Account went to Lawyers. That includes some personal funds as well.
    2) lawyers have told you the estate needs to be wound up [LB]- Perhaps my wording was a bit confusing. The bulk of the estate work is not wound up.

    I don't want my children to be left with this mess. This has turned into an unwanted 15 year second career. Age and health is a factor.
    As always, thank you.


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