One of the major goals clients have when addressing their estate plan is minimizing taxes payable on death (thereby maximizing assets available for loved ones). The taxation of RRSPs can result in a significant reduction of available assets.

When a RRSP annuitant dies, the RRSP is deemed to be sold by the annuitant just prior to death. Accordingly, enormous tax implications may arise. The immediately payable tax burden can be reduced by naming qualified beneficiaries, namely spouses, common-law partners or financially dependent children/grandchildren. The tax implications vary depending on the beneficiary named.

A spouse is often the easiest solution. The RRSP will be included on the terminal tax return but will be offset by a deduction for the same amount. As a result, no tax will be paid on the rollover. The spouse will only pay tax on withdrawals from the plan.

Naming a dependent child or grandchild can also save a significant amount of money. The child (or grandchild) must be financially dependent at the time of death and either a minor or mentally or physically infirm. For a minor child who is not infirm, a term annuity must be purchased with the plan assets that will make payments each year until the child reaches the age of 18. For a child who is infirm, the proceeds can be transferred on a tax free basis to his or her own RRSP or can be used to buy an annuity.

As of 2010, a transfer can occur to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild. The amount transferred to the RDSP cannot exceed the RDSP maximum contribution room of $200,000. The beneficiary will have to pay tax on amounts taken out of the RDSP, much the same way a spouse will be taxed on withdrawals from the RRSP transfer upon withdrawal.

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