{"id":6604,"date":"2024-02-29T19:00:08","date_gmt":"2024-03-01T00:00:08","guid":{"rendered":"https:\/\/www.millerthomson.com\/tax-implications-rrsps-tfsas-and-fhsas-holders-death\/"},"modified":"2025-06-30T15:19:44","modified_gmt":"2025-06-30T19:19:44","slug":"tax-implications-rrsps-tfsas-and-fhsas-holders-death","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/private-client\/tax-implications-rrsps-tfsas-and-fhsas-holders-death\/","title":{"rendered":"Decoding afterlife finances: Understanding the tax implications for RRSPs, TFSAs and FHSAs upon the holder’s death"},"content":{"rendered":"\n

In this article, we consider the tax and other implications of registered plans upon death, including the Registered Retirement Savings Plan (\u201cRRSP<\/strong>\u201d), the Tax-Free Savings Account (\u201cTFSA<\/strong>\u201d) and the new First Home Savings Account (\u201cFHSA<\/strong>\u201d).<\/p>\n\n\n\n

1. RRSPs<\/h2>\n\n\n\n

In Canada, on a person\u2019s death, the person is deemed to have disposed of certain assets for fair market value immediately prior to death. This generally includes RRSPs. As a result, the RRSP annuitant is deemed to \u201credeem\u201d the RRSP at fair market value immediately prior to death. Since RRSPs are contributed to with pre-tax dollars, the full amount of the RRSP is included as income on the annuitant\u2019s final income tax return. Large RRSPs can have large tax liabilities. The personal representative of the deceased annuitant would be responsible for ensuring that income tax is paid on this income inclusion.<\/p>\n\n\n\n

Notably, there may be an income reduction available to the annuitant\u2019s estate to the extent that the RRSP proceeds are paid as a refund of premiums or deemed to be paid as a refund of premiums. Only the reduced amount would be included in the annuitant\u2019s final tax return as income. The proceeds of RRSPs that qualify as a \u201crefund of premiums\u201d are those that are paid to a qualified beneficiary. A \u201cqualified beneficiary\u201d is either (i) the annuitant\u2019s spouse or common-law partner (within the meaning of the Income Tax Act <\/em>(Canada)) (the \u201cSpouse<\/strong>\u201d); or (ii) a child or grandchild of the annuitant who was financially dependent[1]<\/a> on the annuitant for support.<\/p>\n\n\n\n

The qualified beneficiary in turn has an income inclusion for the amount of the refund of premiums received (i.e. to the extent that the deceased received an income reduction, the recipient receives an income inclusion). If the recipient of the refund of premiums is the Spouse, the Spouse may claim a deduction if the proceeds go into a tax deferred vehicle (usually by way of a contribution to their own RRSP). Notably, a child or grandchild who was dependent on the annuitant but not for reasons of mental or physical infirmity may only receive the deduction if the funds are used to purchase an annuity, the final payment for which is made before the recipient\u2019s 19th<\/sup> birthday. Therefore, there is no available deduction for an adult dependent child who is not dependent by reason of physical or mental infirmity. To the extent that the qualified beneficiary claims the deduction, the tax deferment mechanism commonly known as a tax \u201crollover\u201d has been achieved.<\/p>\n\n\n\n

In the circumstances described above, where the proceeds qualify as a refund of premiums, it is generally the personal representative of the deceased annuitant who makes the choice as to whether the estate claims the reduction for the refund of premiums. However there is a circumstance where the recipient effectively controls whether the estate or the recipient pays the income tax associated with the refund of premiums. This is the case in circumstances where what would have been a \u201crefund of premiums\u201d if paid to a beneficiary of the estate is paid to the estate (which would occur if the estate is the designated beneficiary or if there is no designated beneficiary). In such cases, the personal representative and the qualified beneficiary may jointly elect to have the eligible amount deemed to be received as a refund of premiums, allowing the rollover provisions described above to function in these circumstances. Since the election must be made jointly by the qualified beneficiary and the personal representative, the recipient effectively controls whether the reduction can be claimed by the estate.<\/p>\n\n\n\n

Fewer steps are required to achieve the rollover where (i) the Spouse is the sole beneficiary of the RRSP; (ii) the proceeds are directly transferred to an RRSP under which the Spouse is the sole annuitant (or other qualifying vehicle); and (iii) the transfer occurs by December 31st<\/sup> of the year following the year of the death (known as the \u201cexempt period\u201d). If these circumstances are met and the financial institution issues the T4RSP directly to the Spouse, the income inclusion can be that of the Spouse\u2019s at first instance, who may also claim the deduction, and the personal representative would not need to include the RRSP proceeds in the income of the estate at all.<\/p>\n\n\n\n

Finally, there is another rollover opportunity from an RRSP to an RDSP for the annuitant\u2019s financially dependent, infirm child or grandchild. The deceased annuitant will have the usual income inclusion and reduction according to the \u201crefund of premium\u201d rules above. The child or grandchild will have a corresponding deduction. The maximum rollover amount to an RDSP is $200,000, which number is reduced by all contributions and rollover amounts made to the RDSP.<\/p>\n\n\n\n

As mentioned above, the personal representative of the deceased would be responsible for ensuring that income tax is paid on this income inclusion of RRSP proceeds. Where the proceeds do not qualify as a refund of premiums or where the recipient of the refund of premiums can control whether the estate can achieve the reduction, it is important to consider whether the estate is otherwise large enough to pay the associated tax liability and whether it is equitable for the estate to potentially have to pay the tax liability. With respect to the latter consideration, this is particularly relevant where the beneficiaries of the estate are different from the recipient of the RRSP proceeds. The question should be asked: is it equitable for the estate beneficiaries to essentially pay for the income tax liability arising on an asset that passes outside of the estate? The answer to this question depends on the circumstances, preferences and objectives of the annuitant.<\/p>\n\n\n\n

2. TFSAs<\/h2>\n\n\n\n

TFSAs carry fewer tax considerations than RRSPs because contributions to TFSAs are with after-tax dollars and the income earned in TFSAs, assuming no over-contributions were made, are not subject to income taxes, even on the death of the holder.<\/p>\n\n\n\n

Generally, upon the death of a TFSA holder, the TFSA ceases to exist. If the holder of the TFSA has a Spouse, there are two options for the holder to consider: (i) naming the Spouse as the TFSA successor holder; or (ii) designating the Spouse as the beneficiary of the TFSA. The implications are as follows:<\/p>\n\n\n\n