Manitoba Credit Unions | Page 2 | General comparisons | Discussion forum

Bill said
"With respect to non-registered accounts, you would have to state in your will who you want the proceeds of the sale of the account (as it would also need to be liquidated) to go to, so it becomes part of your estate." As far as I know non-registered accounts become part of your estate whether or not you mention in your Will who's to get what's in them.

As far as I know thats my understanding, but I would imagine you can (and should) be able to state what your wishes are, its just that the proceeds of the "sale" would be taxed, unlike in registered accounts.

Bill said Regarding estimating how much will be left after taxes, I think it's been mentioned before here somewhere than an executor should always leave enough undistributed in the estate to cover any additional taxes until the final return has been reassessed by CRA and a clearance certificate has been obtained from CRA. If all goes well that could still be about 1.5 years after death.  

1.5 YEARS! REALLY TAKES THAT LONG?

moneyhelp, aside from possible capital gains there is no tax on the "proceeds of the sale" when a non-registered account is liquidated or becomes part of an estate.

And, yes, estates take time to wind up. I'm not a good executor because the more I sense someone is in a hurry the more I seem to slow down

I agree, Loonie, and that's likely what most people do. I imagine most folks just divide their financial assets among a few beneficiaries instead of willing specific financial assets to specific beneficiaries. I can see wanting certain physical assets, maybe with nostalgic value, to go to certain people, but money's money.

I can see it for the TFSA, as you want to avoid it going through probate. Would this also apply to RSP? (notwithstanding income tax on it)

I guess I haven't given this much thought yet as I'm married, but it will be an issue for one or the other of us eventually, so I should have a plan in mind.

Norman1 said
However, the fair market value of the RRSP will be added to the estate's taxable income for the year of death and taxes will need to be paid by the estate.

moneyhelp said

I assume this is the case should it be any beneficiary other than a surviving spouse/common law (assuming they take ownership) OR if the surviving spouse/common law decides not to take ownership and instead just cashes out?  

The exact requirements for the estate not to include the RRSP value as income are a bit more complicated. This is from RC4177 Death of an RRSP Annuitant or a PRPP Member:

General rule for RRSP – deceased annuitant

When the annuitant of an unmatured RRSP dies, we consider that the annuitant received, immediately before death, an amount equal to the fair market value (FMV) of all the property held in the RRSP at the time of death. This amount and all other amounts the annuitant received from the RRSP in the year have to be reported on the annuitant’s income tax and benefit return for the year of death.

A beneficiary will not have to pay tax on any amount paid out of the RRSP if it can reasonably be regarded as having been included in the deceased annuitant’s income.

Exception – Spouse or common-law partner is the sole beneficiary of the RRSP – We do not consider the deceased annuitant to have received an amount from the RRSP at the time of death if the annuitant had a spouse or common-law partner when he or she died and both the following conditions are met:

• the spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP; and
• by December 31 of the year following the year of death, all the RRSP property is directly transferred to a registered retirement savings plan (RRSP), pooled registered pension plan (PRPP), specified pension plan (SPP) or a registered retirement income fund (RRIF) under which the spouse or common-law partner is the annuitant/member, or to an issuer to buy an eligible annuity for the spouse or common-law partner.

If both conditions are met, only the spouse or common-law partner will receive a T4RSP slip. The transferred amount will be shown in box 18 of the slip. …

thanks. I'll have to add something about this to the evolving financial plan.

However, it seems potentially problematic/risky for the recipient. How would they know whether the executor had paid the income tax? If the RSP is going directly to the beneficiary, then it would seem that it must be paid out of the rest of the estate. If the tax comes out of the estate, who decides what the rate is? Is it automatically at the marginal rate, or would it be at the average rate? Average rate seems fairer, to me, as who is to say which part of the income is the "marginal" part. But, then, there could be a fight between the executor and the recipient over this. I just see a lot of headaches in having a non-spousal beneficiary - and potential legal costs. I suppose it would be OK if you had some way of knowing everyone was going to behave themselves, or if the estate basically only goes to one person anyway - who is also the executor.
I suppose one could try to specify in the will which pocket the tax is supposed to come out of, although I don't know if this would hold up.
I would probably designate a charity. The charitable receipt would offset a lot of this. I believe the receipt would go to the estate.
Really, it seems to me that the executor is responsible for paying this, but if it is to be passed without probate, then the executor doesn't have much of a role as it doesn't go through the estate's bank account. The executor's role, then, is to be the bookkeeper and submit the final tax return.

Let's say the deceased leaves an RSP of 300K which draws a marginal tax of 50% (I am making up these numbers.) The non-spousal beneficiary receives 300K from the bank. Beneficiary is unaware that tax is due on this and/or assumes the executor is looking after it and/or the executor says they are looking after it. Beneficiary does some delayed home repairs, buys a new car and takes the vacation of a lifetime, lasting six months. The money is gone. The beneficiary returns from the vacation to find a bill from CRA for 150K which the executor didn't pay or couldn't pay due to insufficient funds in the rest of the estate; OR finds a nasty letter from the lawyers of the other beneficiaries demanding that the RSP recipient pay what has been deducted from their share in order to pay the tax. Seems to me that nobody will be happy and it could easily end up in court, costing everyone lots more money and bad feeling. Wouldn't it be better to have just put it into the estate in the first place and paid the probate? Am I missing something?

Probate, RIF/RRSP, TFSA, when to name beneficiaries for them and when not to: does anyone know of any literature out there that explains them all in plain, layman's language?

JenE, there's lots of plain language info online, just get a piece of paper and jot down the few, key, salient points as you read and then you've got it for good.

And don't mix together different topics. For example avoiding probate is a different topic than minimizing income taxes after death. You may use both sides of the paper.

Also, you can always consider not getting too caught up in what happens after you die. The seconds are ticking away, unless you've got nothing else you want to do with them (sad), don't use too many up on that - let the living fight it out!

Bill, Thanks for your input. I never even thought about probate until the subject arose with a friend a short time ago. I've read CRA and other online info. I don't find it terribly clear. As for TFSA beneficiaries, I Think that what I read is that if you've got a named beneficiary, the funds go directly to that person and no probate tax is applied. I could be wrong! Sometimes online info on any of these subjects differs slightly from writer to writer. Sometimes it's a short 'blurb', which doesn't promote confidence.

Loonie, I'll certainly look into the book you named, thanks.