Wealth Strategies: Registered Account Beneficiary Designations - More to it Than Meets the Eye

For all registered plans i.e. RRSP’s, TFSA’s and RRIF’s, the application form provides the option of designating a specific beneficiary, and in some cases a successor annuitant. You also have the option of merely designating your estate and providing detailed instructions within your will. That said, there are potential implications of electing one over the other that may not be fully realized until the account holder passes away.

Perhaps it’s best to break it down one by one, beginning with TFSA’s. TFSA’s allow us to name anyone as a beneficiary and the plan value is distributed tax-fee to them upon the death of the account holder. The detail that may be missed however is that any growth from the date of death and the date of payout to the beneficiary is taxable to the beneficiary.

TFSA’s for married couples, however, differ slightly, with the option of naming one’s spouse as “beneficiary” or “successor holder”. If you opt for beneficiary, your spouse gets the full value of the account on the date of death tax-free, and proceeds can be transferred to their own TFSA regardless of whether they have adequate contribution room. Any growth in the account between the date of death and the payout date is taxable to the spouse, however. For this growth to be transferred to their TFSA, the surviving spouse would need to have enough contribution room. Now if you opt to select your spouse as “successor annuitant”, the value at death is transferred tax-free, the same as noted above. The difference however is that any growth occurring after death can also be transferred tax-free to their spouse’s TFSA, regardless of adequate contribution room.

RRSP’s and RRIF’s again give us the option to name anyone as beneficiary. The value of the account on the death of the annuitant, however, is taxable to the deceased on their final tax return. Any growth after the date of death is taxable to the beneficiary. You can also elect to name your estate as beneficiary in the case of more complicated situations, i.e. several siblings, children etc.

For RRSP’s/RRIF’s for those that are married however, when your spouse is named as beneficiary the proceeds would be distributed to them occur in what’s referred to as a “tax-free rollover”. The value of the plan at death is included in the income of the surviving spouse, who then has an offsetting tax deduction. If the proceeds were withdrawn in cash, you could have the option of having it taxable to the beneficiary or the surviving spouse for the year of death.

As always, a bit of advance planning can allow one to fully take advantage of the tax preferential options available to us.