When the Canada Revenue Agency is a Beneficiary of Your Estate

When The Canada Revenue Agency is a Beneficiary of Your Estate

You have done everything to prepare for your retirement. After years of hard work, you’re now ready to relax and enjoy the prime of your life. You know that registered assets will be taxed as income when you begin to make withdrawals, and you’ve named your partner as beneficiary knowing the assets can roll over on a tax-free basis. So when is the Canada Revenue Agency a Beneficiary of your Estate? What do you do if you’re single or your partner has died and you’ve received their registered assets? That’s easy. You’ve made the beneficiary your children, siblings, or friends. But there is a silent beneficiary you may not know about – the Canada Revenue Agency.

An RSP is tax-deferred, not tax-free. You receive a tax deduction when you make your contribution. The assumption is that you will be in a lower tax bracket at retirement, so the tax deduction in your higher-earning years is more advantageous. At 71 the RSP must be converted to a RIF and the following year, at 72, withdrawals must begin, whether you need the money or not. As mentioned, if one partner dies, then their RSP or RIF can roll over to the surviving spouse with no tax consequence (there are also special rules if the beneficiaries are minor children or financially dependent children). But what happens if the beneficiary is someone other than the spouse? At the time of death, the registered assets would be paid out to the named beneficiaries. However, all those assets are added to the terminal tax return and taxed as if they were income. The estate is responsible for paying taxes. Imagine a RIF at $200,000, which is not unreasonable. Adding that to income could result in losing up to half in taxes. Remember, they are tax-deferred, not tax-free. When you die, you are not making any more withdrawals, so the entire amount is taxed as if you withdrew it all. Ouch.

How can you solve this problem? One way is to spend your last dollar and die five minutes later, but unless you have some inside knowledge, that’s not a feasible option.
A more practical and economical way is through life insurance. Life insurance will provide funds to pay taxes due, as well as other expenses such as a funeral, capital gains on second properties, or non-registered assets, as well as accounting, legal, and probate fees. A policy is issued, if there are two people, to pay a benefit when the second person dies. For a single person, it is issued as a single life. The benefit is paid tax-free to named beneficiaries. The funds do not go through the estate (unless the estate is the beneficiary) so they are not subject to probate fees and are not held up while the estate is being settled, which can be lengthy.

Life insurance offers a simple, practical, and affordable solution to the taxes, fees, and expenses that an estate can incur. Feel free to reach out to me if you would like to chat about how this solution could benefit you.

Francine Dick, CFP, EPC | Financial Advisor
Carte Wealth Management Inc. | Mutual Fund Dealer
Carte Risk Management Inc. | Insurance Managing General Agency
425-6755 Mississauga Road, Mississauga, Ontario, L5N 7Y2
C: (647)897-6471 | TF: 1-866-842-2783 | F: (905)238-8197 | E: francine.dick@cartewm.com
www.askfrancine.ca

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