Canada Revenue Agency - what to do when someone has died

Here is an extremely useful link for executors from Canada Revenue Agency. It's called "What to do when someone has died" and contains information about which tax returns need to be filed. It also contains information and forms for dealing with RRSPs and RRIFs of a decceased person. Personally, I would never try to handle an estate without consulting an accountant, but I like to be as informed and prepared as possible to make the most of my consultation. This page is also great for just getting that overview of what your job as executor is going to take. Click here to visit the page. I'll add it to my "interesting links" section so that executors can find the link in the future.

RRSP/RRIF spousal transfers on death - not so automatic

Warning! This post talks about tax. I realize that not everyone finds tax information as interesting as I do, but it's important stuff for all of us.

I'm attaching a link to a blog post by accountant Mark Goodfield, better known as The Blunt Bean Counter. In this post he talks about the transfer of an RRSP or a RRIF from a deceased spouse to a surviving spouse. You might be surprised to find that a spouse can choose simply to take the funds outright rather than receive the funds into his or her own RRSP or RRIF. If that happens, the estate may end up paying the tax.

Click here to read the article, which is very readable and contains tons of good information.

Not knowing this simple tax rule causes problems in estates

I recently dealt with a question from a reader about paying "his portion" of the taxes on a RRIF, which he and another person are going to receive as they are the named beneficiaries of the RRIF. This is something that I hear very frequently, as it's commonly thought that a person receiving an asset must be the person who pays the tax on it. Unfortunately, this is not correct and it causes many problems and disputes in estates where executors don't seek professional guidance.

Let's say that the RRIF in question is worth $100,000, or $50,000 per beneficiary. Let's also say that the tax owing on the RRIF is going to be $30,000, or $15,000 per beneficiary. Plenty of executors (and beneficiaries for that matter) believe that this means instead of getting $50,000 each, the two beneficiaries are going to receive $35,000 each (50,000 - 15,000 = 35,000). This, however, is not the way the tax is paid.

What happens in reality is that each beneficiary receives his or her full $50,000. The $30,000 tax comes out of the estate itself. This means that the tax on the RRIF is paid from the bank accounts, investments, house or other assets owned by the deceased, even if the estate is being left to other people.

This is because the tax on the RRIF is a debt owed by the person who passed away. The RRIF itself is no smaller on the date of death, and so the whole thing must be given to the person(s) named. The law says that debts of an estate are paid from the residue of the estate first, so that's where the payment must come from.

Many people who do estate-planning without legal or tax advice never realize how easily their intent to treat everyone fairly can be upset by their failure to understand this rule. For example, let's say a mother leaves her $200,000 RRSP to her son, and the rest of her estate, which also adds up to about $200,000, to her daughter. She wants to treat them equally and thinks she has achieved this.

What she doesn't realize is that when she passes away, her son will get the whole $200,000 RRSP. The estate will pay the tax on the RRSP. Let's say the tax is $60,000. This means her daughter will receive $140,000. If there are other bills or taxes, the daughter will receive even less. This isn't even close to what the son will inherit, the mother's wishes don't go as planned, and it's quite possible that a dispute will ensue between the son and daughter.

The same rule applies to other assets that give rise to tax when the owner dies. For example, a person who owns rental properties or a lake cottage will also have tax to pay on death, and these taxes are paid out of the estate.

It's possible to draft a will to state that the person receiving an asset should also pay the tax bill associated with the asset, but almost nobody ever does that. I think more people would do that if they were only aware that it was possible. And if they were only aware of the rule in the first place.

Home-made estate planning can be dangerous

Last week I met with a widowed woman to talk about estate planning. Let's call her Mrs. Jones. She was anxious to tell me that what she really cares about is making provision for her disabled son. He is in his 50s, lives with his mother, and is unable to handle finances without help. Mrs. Jones is worrying about what all parents of disabled children worry about - what will happen to the child when the parent is no longer here to look after him. Her primary goal in doing her estate planning was to make sure that he was cared for.

This was a good start. Mrs. Jones told me that she owned her home and some non-registered savings, enough to set up a trust for her son's lifetime and still give an equal share to her other child, her daughter.

Then I discovered the problem that would make Mrs. Jones' plans impossible.

She had already given all of her assets to her daughter years ago. Her home had been transferred, though she still lived in it. Her non-registered investments had all been transferred. This wasn't even a transfer into joint ownership; it was an outright gift. Mrs. Jones owned nothing but her personal possessions and her RRIF (only because a RRIF can't be owned by anyone else), which names her daughter as her beneficiary.

Mrs. Jones said she wants to make a will and set up a trust for her son. She wants him to be able to live in their house as long as he wants. I replied that she doesn't own a house anymore, nor any money to leave for the upkeep and running of a house. It took me a while to make her understand that with her current legal and banking arrangements, she has not a penny to leave to her son.

She was so aghast at this news that I admit I at first suspected coercion on behalf of the daughter, but Mrs. Jones assured me that she had willingly signed over the assets. She just figured they were still "really" hers and that she could still do what she wanted with them. She hadn't realized she'd transferred ownership. She couldn't really explain why she had taken these steps, other than it felt pro-active to do "something" with the house and she wanted her daughter to be able to help her. Had she simply left it all alone and not transferred it to her daughter, Mrs. Jones could have made the will she wanted.

This is an extreme example of the kind of home-made estate planning moves that people make without legal advice. Without meaning to, Mrs. Jones had set things up so that her primary goal - looking after her disabled son - could not be reached. It was the opposite of what she meant to do. The worst case scenario is that the daughter will sell the house and spend the investment money, leaving no assets at all to support her brother. The best case scenario would involve the daughter voluntarily agreeing to transfer assets back to her mother (we'll have to see what tax implications are involved) or to put assets into a trust for her brother.

If the assets are not in Mrs. Jones' name, she cannot give them away in her will. She can't put them into a trust for her son, nor can she name the trustee to look after the funds. She'll have to rely on her daughter to do the right thing in supporting her mother if RRIF funds are not enough, and to look after her brother.

Call me cynical, but I'd prefer to see Mrs. Jones' son looked after by his mother's will than his sister's good intentions. After all, she could run into financial difficulties, or be sued, or get divorced, any of which could leave her elderly mom and her disabled brother in dire straits.

Home-made estate plans are commonplace of course, but they are dangerous. Many Canadians transfer important assets like their homes, cottages and bank accounts to family members because they intend to avoid probate or get help with the banking. In a dismaying number of cases, they don't think far enough ahead. Before taking major steps such as transferring your home or your life savings to someone else, see a lawyer. Find out what the long-term implications are for you and your family.

Does an executor have to pay estate taxes personally?

The toughest part about being an executor is the learning curve; most executors do the job only once during their lifetimes and frankly most are happy not to have to repeat the role. It may seem relatively straightforward to say that the executor is in charge of the estate, but the details can be very challenging. Tax issues are particularly challenging. A reader has a question about executors and taxes that I thought everyone would find useful:

"My brother is the executor for our father's estate. He left us a RRIF to each of his children (and common law spouse) which is not considered part of the estate. There are potentially large taxes to pay on this plus other taxes. Who is responsible to pay? If there is not enough funds in the estate is the executor responsible for outstanding debts/taxes? He fears he may be made bankrupt from his personal savings."

You're right that assets with designated beneficiaries, such as a RRIF (also including RRSP, life insurance policies, pensions, LIRA, etc) do not fall into the estate. They are paid directly to the beneficiary named.

You're also right that there could well be a big tax hit on the transfer. Money that is contributed to a RRIF is put in on a tax-deferred basis. The income tax is paid on it when the money is taken out of the RRIF. The law says that when you die, your RRIF is deemed to be cashed one minute before your death. Therefore all of the money comes out at once, and the tax all becomes owing.

The portion of the RRIF that is going to your father's common-law wife may be eligible to be rolled over to her without tax being paid.

The taxes must be paid by the estate, even though the RRIF money didn't go into the estate. This is often hard for people to accept, because it may not seem fair that the people inheriting the residue are the ones who basically are paying the tax. However, the tax on the RRIF is a debt of the deceased and his estate is responsible for his debts.

Your brother should work with an accountant or lawyer who specializes in estate and tax matters to ensure that he becomes aware of all elections, deductions, carry-overs or other tools that might be available to minimize the taxes.

Should an estate not have enough assets to pay the taxes, the executor is not personally responsible for paying them. His job is to administer the deceased's affairs, not to involve his own money. This is just one more reason executors are always advised to keep their own funds strictly separate from estate funds. Unless he has been fraudulent or negligent in his administration of the estate, he should have no fear of damaging his own finances.

I appreciate you taking the time to send me a question. Please understand that these are the general rules that apply to estates and taxes, and that specific facts in your case could conceivably bring about a different result. I strongly urge your brother to seek professional guidance.

Photo from http://www.dreamstime.com/

Which assets does an executor deal with and which are outside of the estate?

This reader has questions about the powers and responsibilities of an executor and trustee, and which assets fall within their control. This information is essential to the estate administration process, so I thought I'd cover it here for all to read.

Here's the question:

"When an estate is probated do all assets fall under the probate or can some things be dealt with before hand such as banks, life insurance and investments and if something needs to be done through probate can we proceed at that time? If the executrix/trustee is not a joint tenant of the house, who is responsible for selling the house? Would it be the joint tenant or the trustee?"

Parts of this question are quite clear to me, though I'm not sure I understand the part about dealing with assets "before hand". I'll get to that, though.

All assets owned solely by the deceased fall into the estate. The two types of property that don't fall into an estate are both mentioned in the reader's question. One type is an asset that is jointly owned by the deceased with someone else. The other type is an asset with a designated beneficiary. These are usually life insurance policies, RRSPs, RRIFs and pensions.

Note that this does not include RESPs, which do not go to the child named in the plan, but stay in the deceased's estate.

If the house was owned by the deceased and a joint tenant, on the death of the deceased the ownership passes to the other joint owner. It would be up to the other owner to arrange for the title to be changed. Please note that where the joint ownership is between generations, such as between a parent and a child, this is THE OPPOSITE. Joint title doesn't automatically go to the child joint owner when the parent dies. The child is deemed in law to be holding the title on trust for the estate, and it's for the executor to deal with.

If the house was not held in joint tenancy but was held just by the deceased alone, it becomes part of the estate and it's the executor's job to sell it or transfer it in accordance with the will. This cannot be done before probate is issued by the court.

I'd like to get into the part about dealing with assets before hand. If the question is whether any of the assets can go out to the beneficiaries before the deceased actually dies, the answer is no. To me that seems starkly obvious but I'm asked the question frequently enough to know that not everyone sees it that way. If the person hasn't died, keep your hands off their assets even if they have named you specifically as beneficiary.

Once the deceased has passed away, the executor should advise any joint owners of the death of the deceased and tell the joint owner it's up to them to change the title. The executor should advise life insurance companies of the death of the deceased, and let the insurance company deal directly with the person named as beneficiary in the policy. The executor should also advise the bank that holds the RRSP or RRIF and let the bank deal directly with the beneficiary who will receive the funds. The executor should co-operate by giving copies of the death certificate etc to allow these other parties to get on with the business at hand. Probate is not required for these transactions.

The deceased certainly can - and should - deal with these assets before death by naming the beneficiaries on the life insurance, RRSP etc. During the estate planning process, joint assets and beneficiary designations are part of the same big picture that includes the will and power of attorney. It all has to fit together.

Anyone with this type of question who lives in Alberta can check out my "Alberta Probate Kit" book, as it covers these topics in much more detail.

Naming the estate as beneficiary

I'd like to talk about this reader question in today's post, as it's something that almost everyone will think about during their estate planning. Here's the question:

"It would seem to me that naming a person as a beneficiary instead of an estate would be the easiest and fastest route for distribution. Is there some benefit that I can't see to naming an "estate" as a beneficiary."


Assets that can be designated as going to a certain beneficiary are RRSPs, RRIFs, LIRAs, segregated funds, life insurance policies, pensions and a few less common assets. Designating a beneficiary means that at the time you buy or set up the asset, you state on the asset itself who is to receive that asset when you pass away. Assets with designated beneficiaries are not controlled by your will, unless they name the estate.


This brings us to the reader's question. Why would someone designate their estate to get the funds rather than leaving them directly to a beneficiary? Keep in mind that there is no right answer for everyone. For many people it's a good idea to name a beneficiary directly, while for others it's clearly advantageous to name the estate. Each person (hopefully with the help of an estate planner) will have to figure out his or her best course.


Let's look at an RRSP or RRIF. As most people know, money goes into these plans without being taxed first, and the tax is paid when the money comes out. When you pass away, the law says you are deemed to have cashed in your RRSP or RRIF, so the entire amount becomes taxable all at once. The only way you can save this tax is to designate your spouse (and in limited circumstances a dependent child) as your beneficiary and roll the plan over to him or her. This usually, though not always, means that designating the spouse is a better idea than naming the estate. If the estate were named as beneficiary, the tax would be payable.


Not every asset carries a tax liability, which gives more flexibility in naming a beneficiary. For example, life insurance policies are not taxable in the hands of the person who receives the funds. And the reader is correct that naming a beneficiary can be simpler. If the life insurance money goes directly to a person rather than the estate then there is no need to get probate just to deal with the life insurance.


However, life insurance is often left to a person's estate. This is not at all unusual because naming your estate as the beneficiary of your life insurance policy is a way of creating more cash in your estate. The estate doesn't have to pay tax on the life insurance money  it receives. Business owners like this because it allows them to leave something in the estate for their children who are not inheriting the family business. Individuals with cottages like to leave insurance money in their estates to pay the capital gains tax on the cottage so that the cottage can be kept in the family. A person with lots of debt or taxes might leave life insurance to cover those debts or taxes. These are just a couple of examples but there are several good reasons to leave life insurance to the estate. 


Estate planning is designed to ensure that all aspects of your financial life - will, business agreement, power of attorney, joint property and designated beneficiaries - all work together to achieve your goals.

The importance of beneficiary designations

Naming a beneficiary for certain assets is an essential part of your estate planning. It's important to understand how the beneficiary designations will work with your will, your joint property and your intentions. This article from http://www.capitalmagazine.ca/ talks about the types of assets that should have designated beneficiaries, and their importance. Click here to read the article.

An estate planning checklist (or, Stop Going Out in a Blizzard in Nothing But Your Boots)

What's the difference between estate planning and getting a Will made? It's approximately the same difference as going out in the middle of a -40 Alberta blizzard wearing a parka, mitts and boots, versus going out into that same freezing weather wearing nothing but the boots. The parts that are covered will be fine. The uncovered bits, not so much.

The elements of an estate plan, pared down to their essence, are:

1. A Will. Important issues are the choice of executor, the choice of a guardian for minor children, distribution of your assets to your beneficiaries according to your wishes, and the inclusion of powers for the executors and trustees.

2. A Continuing, Enduring or Durable Power of Attorney. Important issues are the choice of attorney to represent you, how or when the document is to come into effect, and controls on the attorney. May include addressing immediate needs due to incapacity.

3. A Health Care Directive. Again important is the choice of agent to represent you, and the clear expression of your wishes. For older individuals, may include discussion of various supported living arrangements to address limitations.

4. Title to various properties. Important decisions are joint ownership and tenancy in common, right of survivorship, tax effects, potential disputes, and effect on overall estate plan.

5. Insurance coverage. Major issues are ensuring liquidity to cover tax liability, creating new wealth for distribution and keeping up with changing lifestyle insurance needs.

6.  Beneficiary designations. Tax savings are important. Also important are obligations to a spouse, the impact on the overall estate plan and creditor-proofing. Affects RRSP, RRIF, TFSA, ESOP, LIRA, DRIP, pension and life insurance.

7. Business succession planning. Important issues are choice of family successor, other possible exit strategies, tax planning, future income and timing. Should tie in with shareholder's or buy-sell agreement and company-owned life insurance.

8. Tax planning. Looking for ways to minimize taxes and maximize funds for distribution in the estate.

9. Trusts. Important issues are income-splitting for tax purposes, protection of handicapped adults, protection of children, and preserving assets to be inherited by a beneficiary at a later date.

10. Charitable giving. Important issues are giving back to the community, creating lasting legacies and creating tax credit.

11. Retirement planning. Includes discussion of dissipation or sale of current assets, business succession timelines, planning for incapacity and changing insurance needs.

12. RESP. Appoint a successor director of the plan.

13. Family dynamics. All of the items on this list are discussed in the light of the roles, abilities, shortcomings and personality of the various members of the family. Issues that may crop up are subsequent marriages, children from different marriages, separation agreements, divorce, common law arrangements, illegitimate children, disabled children, children vying for a place in the family business, belligerent or overbearing children, disputes between spouses or children, estranged family members, greedy or untrustworthy family members, and children with addictions.

As you can see, the items listed here overlap and loop back to each other. The idea is to make sure that everything works effectively together to achieve your goals. So use this checklist for your own planning and stop going out in just your boots.

Retirement Shocker

This article talks about beneficiary designations, something we've talked about a number of times on this blog. It's definitely worth repeating though because it continues to trip up so many people. Estate planning is not just about getting a Will made. It's about setting up a comprehensive plan that includes all of your assets and liabilities, and all of the people that are important to you. Click here to read the article. It's American and therefore refers to US 401Ks, but the very same principle applies to Canadian RRSPs and RRIFs.

Rights to property when a husband or wife passes away

The laws that touch on estate planning and estate administration favour spouses over other people in many ways. For example, if someone dies without a Will, the person having first priority to apply to become the administrator of the estate is the spouse. As another example, a person can roll over his or her RRSP to his/her spouse on death on a tax-deferred basis whereas he or she can't get the same rollover tax break with other people.

But what are the limits on the rights of a spouse when his or her better half passes on? Many people decide not to make any estate plans because they somehow assume that the spouse left behind will own everything and have the right to look after everything. That isn't the case of course, so let's talk about the real situation and what you should do.

First of all you must realize that the simple fact that you got married doesn't change joint ownership of property you already own with someone else. If you own a cottage jointly with your brother, or your home is still jointly held with your first spouse, simply getting married without you taking any other steps won't change the ownership.

Getting married doesn't automatically change your life insurance policy designation or your RRSP designation. If your policy still names your mom or your children from the first marriage as the beneficiaries, the fact that you got married will have no effect unless you contact the insurance company or bank and request the change.

If you haven't made a Will, your spouse is probably only entitled to a portion of your assets (depending on where you live and whether you have children). So if you want your spouse to "own everything" after your death, you have to take some steps to make that happen.

A number of things have to work together. You need to make a Will that deals with all of the assets that are in your name alone. If you want your spouse to own real estate that you currently own jointly with someone else, you are out of luck unless you take steps to change the title while you are alive. Saying in your Will that you want him or her to own your joint property will do nothing as the joint owner has a right of survivorship that a Will can't touch.

You also need to look at beneficiary designations on your life insurance, RRSPs or RRIFs, and pension plan. If your spouse is not the beneficiary designated then your spouse is not going to inherit it after you pass away. An exception may be pension plans, as many are payable to your spouse even if you have not updated your records with them. Unlike joint property, you can change a beneficiary designation on many financial plans using your Will.

The other part of spousal rights after a partner's death is the right to deal with your assets. I often hear a person make a statement like "my wife can sell my stuff after I'm gone" when that person hasn't made a Will naming his wife as his executor. If she is going to sell anything that isn't hers, she is going to have to apply to the court to become the administrator of your estate first.

The bottom line is that although there are special allowances made between a married couple in tax laws and other relevant laws, a husband and wife are still two people, not one. If you want to bring about a certain set of circumstances, you have to actively take steps to set things up that way.

Can a power of attorney change a beneficiary designation?

I was asked this question yesterday when speaking to a group of Sunlife financial advisors, and in fact I'm asked it pretty often. The question is whether an attorney acting under an Enduring Power of Attorney can change an existing beneficiary designation on behalf of the person he or she represents. For example, if Haley is acting as attorney for her Dad, and Dad has a RRIF that designates his two children as the beneficiaries, can Haley change that?

Beneficiary designations are found on RRIFs, RRSPs, LIRAs, segregated funds, pensions, insurance policies and other instruments.

The answer is "no", the attorney cannot legally change an existing beneficiary designation. It doesn't matter if the attorney agrees with the designation or not; it's not the attorney's money or the attorney's decision.

It's possible that an investment that has a designated beneficiary might mature, and the attorney has to take steps to re-invest it on behalf of the person he or she represents. In this case, the attorney's job is to continue the designation that had been made before. Deciding not to continue the designation is the same as deliberately changing it.

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."