What Should You Do If You Inherited an RRSP? A Simple Guide to a Complicated Question

As the population in Canada grows older, it is becoming increasingly common for individuals to inherit retirement accounts from their deceased loved ones. However, beneficiaries should be aware of the next steps to take in order to avoid making costly mistakes.

There are several choices in how you can handle an inherited account. This may depend on a variety of factors, including your relationship to the original account holder, the age of the original account holder when they passed and the type of account you’ve inherited. Here are a few important steps to take upon inheriting an RRSP.

Step #1: Receive an RRSP Slip

For tax reporting purposes, the issuer of the RRSP prepares a slip that’s used to report the amounts paid from the deceased annuitant’s savings from the day after the annuitant died until December 31 of the following year.¹

Step #2: Determine the Type of RRSP and the Amount Paid

If you’re a spouse of the deceased, the prior year-end account value and life expectancy are needed to calculate the distribution amount on your inherited RRSP. For this calculation, the value of the account from the last calendar year is used. For example, in order to calculate distributions for the year 2021, the account value on December 31, 2020, is used.¹

There are multiple types of RRSPs, including:

Unmatured RRSP
Matured RRSP
Depository RRSP
Trusteed RRSP
Insured RRSP
Unmatured RRSP

If an RRSP is unmatured, that means no payments have yet been made to the original beneficiary. The amount that they are expected to receive before death is an amount equal to the fair market value (FMV) of all the property held in the RRSP at the time of death. The amount that was received this year has to be reported on the annuitant’s income tax and benefit return for the year of death.

However, it is possible to defer income tax if an eligible person has been designated as the beneficiary of the RRSP. This includes:²

A spouse or common-law partner.
A financially dependent child or grandchild under 18 years of age.
A financially dependent mentally or physically impaired child or grandchild of any age.

Matured RRSP

This plan is used to pay retirement income to the beneficiary for the year of the payment. It needs to be mature by the end of the year that the annuitant turns 71.³ The beneficiary does not have to pay tax on any payment made out of the RRSP if it has been included in the deceased annuitant’s income.

If the period of pay is from January 1 of the year after, then there are three other types: depository, trusteed and insured RRSPs.

Depository RRSP

When issuing a Depository RRSP, interest or income that is accrued after the exempt period may be a tax-paid amount.

Trusteed RRSP

The trust can claim a deduction based on the income that is earned after the exempt period.

It is to be paid to the beneficiary in the year that it is in the trust income. If the deduction is claimed, this amount is a tax-paid amount and an RRSP benefit.

Income earned or realized after the exempt period that is not paid to the beneficiary in the year that it is trust income is not an RRSP benefit.

Insured RRSP

The tax-paid amount does not apply to an insured RRSP. Therefore, any payment to a qualifying survivor from an insured RRSP is considered a refund of premiums, regardless of when it is earned or paid.⁴

Step #3: Transferring the RRSP

If a qualifying survivor receives a refund of income premiums then they can hold off on paying taxes on the amount by transferring it to an RRSP. When it comes to transferring, they can go to:

The annuitant's spouse or common-law partner
The annuitant’s financially dependent child or grandchildren

It’s also important to note that the survivor needs to be 71 or younger at the end of the year that the transfer is made. The annuity payments can start no later than one year after they were purchased. If the survivor is already 71 in the year that the premiums are received, then the RRSP transfer needs to be completed by December 31.

The qualifying survivor is able to use a receipt to get a deduction on their income tax and benefit return the year that they received the premiums.

To avoid making costly errors, you should meet with a knowledgeable advisor as soon as you learn that you have inherited an RRSP. Mistakes could mean larger taxes and complexities in the long run.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.