Terry McBride: Personal finance column for November 12, 2012

RRIF at death
What happens to your RRIF when you die?

Take the example of Martin and Ruth, a couple, both age 80. Martin has a
Registered Retirement Income Fund (RRIF) worth $100,000.

During his working years, Martin claimed tax deductions and received refunds
from making Registered Retirement Savings Plan (RRSP) contributions. When he
retired he converted his RRSP to the RRIF and continued the income tax deferral.

The RRIF money has never been taxed before. Martins $1,000-per-month
withdrawals are fully taxable.

Successor annuitant

Assume Martin designates his wife Ruth as RRIF successor annuitant. When
Martin dies, Ruth automatically becomes the new RRIF owner. The tax-deferred
rollover is smooth. T4RIF tax slips are issued only for regular monthly
withdrawals. If Martin dies in October, one T4RIF slip would show the $10,000
year-to-date withdrawals in Martins name. Another T4RIF slip would show
$2,000 for 2 months withdrawals in Ruths name.

The successor annuitant arrangement avoids probate court and lawyers fees
(totalling roughly $2,000) as ownership of Martins $100,000 RRIF is transferred
to Ruth.

RRIF beneficiary

What if Martin merely designates his wife Ruth as beneficiary of his RRIF and not
as successor annuitant? Ruth can become the new owner and continue to defer tax
on her inherited RRIF. Again, they avoid probate costs.

However, Ruth has some extra paperwork to deal with. The financial institution
will issue a special T4RIF tax slip showing the $100,000 market value as Ruths
income. She should also receive an offsetting 60L receipt to be claimed as a line
232 deduction. The receipt may be issued as an RRSP contribution, which might
confuse her accountant since Ruth is 80.

Hopefully the financial institution would agree to Ruths request to treat her as the
RRIF successor annuitant, since she is both executor and beneficiary.

No beneficiary

What if Martin neglected to designate Ruth either as RRIF beneficiary or as

successor annuitant? Ruth expects to inherit the RRIF anyway since she is sole
beneficiary of Martins will. Ruth, in her dual role as executor and will beneficiary,
can ask the financial institution to treat her as the RRIF successor annuitant.

With no designation, however, the RRIF would still be an estate asset. Martins
will determines who inherits his RRIF. Since the financial institution would

normally require his will to be probated before transferring ownership of the

$100,000 RRIF, Ruth can expect to pay about $2,000 in court fees and lawyers
fees.

Fortunately Canada Revenue Agency, does allow the RRIF to roll over to Ruth on
a tax-deferred basis, since she inherits through the will, provided she completes
form T1090.

Ruth could ask her accountant to determine the optimum rollover amount. Maybe
she can save some tax by deliberately including some of the $100,000 value as
income on Martins final T1 return for the year of death, especially if deductions or
tax credits would go to waste if his income is otherwise very low.

No spouse

What if Ruth dies first? Should Martin let his RRIF become part of his estate
governed by his will? Or, should his RRIF contract state the beneficiarys name?

If the RRIF forms part of Martins estate, probate costs are incurred. On the other
hand, designating a RRIF beneficiary contractually avoids probate costs.

Either way there is no tax withheld at source when the $100,000 is paid out. With
no spouse or dependent child to inherit the RRIF, a $44,000 tax bill could be
triggered (assuming Martins income reaches the top Saskatchewan marginal tax
bracket on his final T1 tax return). When the RRIF falls into Martins estate, ready
access to $100,000 cash makes it easier for the executor to pay the $44,000 tax and
$2,000 probate costs.

Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do
not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable
but cannot be guaranteed. This is provided for information only. Securities offered through Raymond
James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through
Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.

October 28, 2012