In 2019, more than 724,000 Albertans made an RRSP contribution¹. So, it would not be an overstatement to say these accounts are a widely-used savings vehicle in our province. 

RRSPs, as well as their extension, the RRIF, receive unique tax treatment. RRSP contributions create tax deductions; investment income earned within RRSP/RRIF accounts compounds on a tax-deferred basis and withdrawals/deregistrations are generally included in income. These accounts also receive unique tax treatment on your death. 

In Alberta, if you hold an RRSP or a RRIF you are allowed to name a beneficiary of the account, and the beneficiary can be anyone you choose. Generally, if you name a beneficiary directly in the RRSP or RRIF contract, funds pass outside your estate and are paid directly to the named beneficiary(ies) upon your death. 

Understanding the impact of beneficiary designations and the taxation of these accounts on your death are essential when crafting your estate plan.

Tax treatment of accounts on death

An RRSP or RRIF is deregistered at the time of death unless transferred directly to a “qualifying beneficiary”. The effect of this deregistration is that the entire value of the RRSP or RRIF may be taxable at the time of death.

A transfer of the registered assets at death to a “qualifying beneficiary” can shift the tax liability to the qualifying beneficiary, and in some cases, defer the tax. Qualified beneficiaries are defined as: your spouse or common-law partner or a financially dependent child or grandchild. The most common scenario for a tax-deferred transfer is to a spouse or common-law partner. 

RRSP accounts - spouse or common-law partner to receive proceeds

Your RRSP can be transferred on a tax-deferred basis to your spouse or common-law partner at death, if they are named as the sole beneficiary of your RRSP. This opportunity is also available if the estate is named the beneficiary of the RRSP and your spouse is named beneficiary of the estate through your will.  

On a surface evaluation, a direct beneficiary designation on your RRSP account versus designation through your will may seem similar, however the process for each varies and will change how the executor of the estate completes the deceased’s final tax return, as well as the return for the surviving spouse / partner. Naming your spouse or common-law partner as the sole beneficiary in the RRSP contract will generally simplify tax reporting and the administrative process. We recommend you refer to ATB Wealth’s RRSP Reference Guide to learn more.

RRIF accounts - spouse or common-law partner to receive proceeds

Similar to RRSPs, your RRIF account can be transferred on a tax-deferred basis to your spouse or common-law partner at death via a beneficiary designation on the account, or your will. However, RRIF annuitants in Alberta have another option, which is to designate their spouse or common-law partner as “successor annuitant”. 

Only a spouse or common-law partner can be designated as a successor annuitant. Under this designation, the RRIF continues in the name of the surviving spouse or common-law partner, who now becomes the annuitant of the RRIF going forward. All the assets in the RRIF remain tax-deferred. The minimum payment is based on the schedule set out in the original plan.

Although the survivor becomes the annuitant of the existing plan, there is still flexibility. The assets can be transferred on a tax-deferred basis to another RRIF, or if the survivor is under 71 he or she could transfer assets back to an RRSP.

The benefit of the successor annuitant versus a traditional beneficiary designation is a more simplified transfer of assets and tax reporting on the returns for both the deceased and their surviving spouse. ATB Wealth’s RRIF Reference Guide provides more details.

The impact of divorce or relationship breakdown on beneficiary designations

The Alberta Wills and Succession Act deems a deceased’s former spouse or adult interdependent partner (AIP) to have predeceased the person who made the will, for the purposes of gifts or appointments under the will; unless the will specifies a contrary intention.

Generally, a one year separation is required to end an AIP relationship. The parties may also enter into a written agreement that provides evidence that the AIPs intend to live separate and apart without the possibility of reconciliation.  

A divorce decree, or court order deeming the marriage void, must be issued for married couples. Legal separation of married couples does not affect the designations in a will.

The provisions in the Alberta Wills and Succession Act do NOT apply to direct beneficiary designations on accounts including: RRSPs, RRIFs, TFSAs or beneficiary designations on insurance products or policies. If you, as the account holder, do not want these accounts to pass to your ex-spouse or former AIP partner, you are recommended to first consult with your lawyer to determine if there are any provisions of a property settlement agreement, or court order dealing with property division, that would prohibit you from making a change. Following that, you should update your beneficiary designations accordingly.  

Estate planning checklist

As part of your estate planning process, we recommend the first stage be a review of your will and existing beneficiary designations on all accounts that permit the election of a beneficiary or successor , including:

• RRSPs
• LIRAs
• RRIFs (Is your spouse/partner your beneficiary or your successor annuitant?)
• LIFs (Is your spouse/partner your beneficiary or your successor annuitant?)
• Registered pension plans
• TFSAs (Is your spouse/partner your beneficiary or your successor holder?)
• Insurance products (particularly life insurance, segregated funds, annuities)

Is it your intent to pass the value of these accounts to your spouse or common-law partner? Are they named as beneficiaries? Are there any instructions in your will that would be contradictory to the beneficiary designations on your accounts?

In the event of a divorce or breakdown of an AIP relationship, you are recommended to execute new wills, enduring powers of attorney and personal directives and review and update all beneficiary designations accordingly. 

Looking forward, we know the current market values for all your assets will not remain static and even the types of assets or accounts you hold may change over time. They will be affected by life events, market returns, your household’s yearly cash inflows and outflows, taxes, possible sales and acquisitions of assets, and even mandatory withdrawals, such as the case with RRIF accounts. Therefore, we recommend a part of your estate planning process include a financial plan that tracks the progression of your net worth over time. Depending on these projections, your will and beneficiary designations may need to be updated in the future.