So its off the mortgage topic this morning but i located this article and wanted to share with the readers. Like me you may not be thinking about your RRSP’s upon death, but its something to take note of since the markets decline which has affected our savings for retirement….
One of the most important tax changes announced in this year’s federal budget, which could provide tens of thousands of dollars in tax relief to affected individuals, has flown under the radar screen.
The new measure concerns the tax treatment of an RRSP or RRIF upon death. When the annuitant of an RRSP or RRIF dies, unless the funds are transferred to a surviving spouse or partner’s RRSP (or, under special circumstances, to a dependent child or grandchild), the fair market value (FMV) of the deceased’s RRSP or RRIF immediately before death must be included in his or her final tax return for the year of death.
Given the market carnage of the past 18 months, what if the value of an RRSP or RRIF included on the deceased annuitant’s final tax return declines in value after death, but before it’s paid out to a surviving beneficiary?
In such a case, the estate could end up paying tax on an amount that is actually greater than the amount that is received. For example, assume Gary held ABC Inc. shares in his RRSP that were worth $200,000 when he died in June, 2008. By the time his RRSP was finally paid out in January, 2009, the ABC shares had fallen by 40% to $120,000.
Prior to the budget, there was no mechanism to claim the $80,000 loss. In other words, Gary’s estate would pay tax on the fair market value of the RRSP at the date of his death (i.e. $200,000), notwithstanding the fact that the estate only received $120,000 of proceeds after selling the shares.
This issue was initially brought to the attention of the Department of Finance by the Canada Revenue Agency more than a decade ago. At that time, the Department acknowledged that unintended tax consequences may result in certain situations.
This year’s federal budget solves this problem by allowing the amount of the “post-death” decrease in value of the RRSP or RRIF to be carried back and deducted against the RRSP/RRIF income on the deceased’s terminal return.
The amount that can be carried back is simply the difference between the amount included as income for the deceased annuitant and the amount paid out of the RRSP or RRIF after death.
This measure applies to all final RRSP or RRIF payouts from Jan. 1, 2009.
Jamie Golombek CIBC Wealth Managemet