Retirement » RRSP/RRIF

RRSP and RRIF tax traps

The designation of beneficiaries is a very important component of estate planning especially when it comes to the RRSPs and RRIFs. It has been regular practice for financial advisors and institutions to list a beneficiary designation for the Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIFs).

Related article: Designating Beneficiaries for RRSPs and RRIFs

Generally it is common practice if you have a spouse to list your spouse as the beneficiary because the transfer will qualify for a tax deferred rollover to the spouse and there will be no tax paid. Remember that CRA will get their money later.

With a RRIF only, if you are going to list your spouse as the beneficiary, you may want to designate your spouse as a successor annuitant instead. In this case, the spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.

Watch beneficiaries other than the spouse

When someone other than the spouse is listed as the beneficiary, the RRSP/RRIF is deemed to have been sold just prior to death and the tax burden goes to the estate. Here’s a quick example of this:

Richard was in his second marriage and wanted to make sure that his 2 children, Beth and Art would get part of his estate. As a result, he listed his two kids as the beneficiary of his RRSP. His new spouse would get the house and his pension.

When Richard passed away, the kids got the RRSP money but the RRSPs were still taxable to the estate. When the final tax return was done, there was a significant tax bill but no money in the estate to pay it. The house and the pension did not go through the estate as it went directly to the spouse.

In the end, the kids had to pay the tax but the problem was they spent the money right away. The relationship with their mother-in-law was damaged for life because they felt that she should pay for part of the tax bill.

My two cents

There are a few possible solutions to prevent this trap from happening. The first is to simply watch the designation of beneficiaries on RRSPs and RRIFs. Just remember that no matter who gets the money, there will be tax that has to be paid.

Also remember the joke “Die broke and have fun at it”. The reason it’s a joke is because it’s really hard to do. That being said, when it comes to RRSPs, it’s best to have spent them before you die because they all become taxable when you die. The key is not to die with too much RRSPs but rather spend them while you are living.

Related article: Don’t Die with too much left in the RRSPs

And lastly, remember that life insurance can be a great estate planning tool because it creates liquidity. One of the benefits of having life insurance is it can create money in the estate to pay for the tax liability.

Related article: The role of life insurance in estate planning


  1. rhonda caplan

    I retire in Sept. and my advisor is wanting me to convert to a RIF.immediately. From your tips I just found out that a designated benificiary (my only child) will have to pay taxes. I currently (10 months from retirement)
    have 92000.00 in Rsps with my advisor and 27,000 from my work Rsp.
    Would I be better off to leave my son money through an annuity,and which one.
    Thank you. BTW I have a lifetime annuity from my ex spouse valued at 192, a life annuity.

  2. Wil

    If I retire at 62, can i start withdrawing RRSP month by month… Iam not applying CPP at 62, I’ll wait till 65. or I should wait till 65 as per rule says??

  3. Michael Scott

    How do I accept financial advice from someone who can’t figure out familial relationships?

    “The relationship with their mother-in-law was damaged for life because they felt that she should pay for part of the tax bill.”

    There is no “mother-in-law” in this scenario; the second wife is the childrens’ STEPMOTHER, if anything!

  4. rhonda

    A bit harsh….it was a scenario.
    I think there are wonderful things we can learn from each other.Thank you Jim for your advice and caring.

  5. alex

    Why was their relationship with their mother in law damaged? What did their mother in law ever do to them? I feel bad for her, she didnt even get the house or pension and everyone is blaming her!

  6. Dissey

    My question is why the estate has no money to pay for it (the tax)? A RRSP withdrawal usually has the tax withheld and sent to CRA. The two children would be receiving money after the tax withheld so they wouldn’t be able to spent them all.

  7. Peter

    Please advice

    I currently receive GIS based on estimated income due to retirement. Last year, I transferred my RIFF back to RRSP (I am younger than 71) and recently received a T4RIF in which all my RRIF is taken as taxable income. Thus I didn’t really receive any money from this transfer, but my total income for 2018 will be much higher than GIS limit. Although the transferred amount can get full deduction on line 208 of my return and reach a low net income on line 236, I am afraid the high total income on line 150 will make me ineligible for GIS. Your opinion? Please advice. Thanks a lot!

    • Doug Runchey

      Hi Peter – As long as the RRIF income and the RRSP re-contribution both occurred in the same taxation year, this shouldn’t cause you any problem with your GIS because they will offset each other.

Leave a reply

Your email address will not be published. Required fields are marked*