Beneficiary Beware

Every taxpayer is responsible for paying his own income tax liability when it is due. To the surprise of many, there are situations when the Canada Revenue Agency has the right to utilize an alternative remedy if individuals or their representatives fail to comply. Even more shocking for some is that individuals named as beneficiaries under an RRSP or RRIF can unwittingly become indebted to the CRA.

The death of an RRSP or RRIF annuitant creates an income inclusion for the deceased equal to the fair market value of the property held within the RRIF or RRSP. This income amount is included in the annuitant’s income for the year of death, adding to other tax liabilities that may arise in the final tax return. There are some rollover situations that create
exceptions to the general rule. For example, when the deceased’s spouse or financially dependent children or grandchildren are named as beneficiaries, the flow of the funds can create an offsetting deduction for the deceased and eliminate the tax liability that would
otherwise arise from the deemed disposition at death of the RRSP or RRIF. Through these rollover exceptions, an amount equal to the RRSP “refund of premiums” or RRIF “designated benefit” (which is essentially the value of the plan at the date of the annuitant’s death) offsets the deceased’s income inclusion. Funds are then taxed in the hands of beneficiaries when withdrawn from the plan.

When a beneficiary receives RRSP or RRIF funds directly under the terms of the plan, and no rollover applies, that beneficiary becomes jointly and severally liable together with the deceased for the amount of taxes owing in respect of the proceeds received. If an estate receives the proceeds directly as the beneficiary of the plan, it is the estate that is liable for the taxes owing. A beneficiary of the estate who subsequently receives funds from the estate is not jointly liable. The estate is normally responsible for paying the deceased’s tax liability including that which arises from the deemed disposition of any RRSP and RRIF assets. When there is a deficiency of funds available within the estate, a beneficiary’s joint and several liability extends the CRA’s reach, providing a remedy for recovering amounts owing. The CRA cannot demand all of the RRIF or RRSP proceeds, but rather the remedy is limited to the collection of taxes owed in respect of the RRIF and RRSP proceeds.

In a June 2013 decision by the Tax Court of Canada, Justice Rowe reinforced a prior court’s decision with respect to how the amount owing by a beneficiary under a joint and severable liability is to be calculated. The ruling sets out the degree of exposure that arises when an estate lacks sufficient resources to fund the tax liability specifically related to the RRIF or RRSP.

In Higgins vs. the Queen the facts are as follows:

  • Arthur Higgins passed away on February 12, 2002.
  • He had a non-registered segregated fund policy valued at $10,192, with his two daughters named as beneficiaries.
  • He had a RRIF of $29,272, also with his two daughters named as beneficiaries. They were not financially dependent on him.
  • He had a small bank account that was used to pay for funeral expenses. By the time the case was heard by the court, the estate owed taxes, interest and penalties totalling approximately $18,000.

The CRA assessed each of the sisters for $5,096 in respect of the property received as beneficiaries under their father’s segregated fund policy, and $6,047 each in respect to the sisters’ joint and several liability for tax in respect of their father’s RRIF.

In determining a beneficiary’s exposure to the annuitant’s income tax liability in respect of an RRSP or RRIF, Justice Rowe reconfirmed a prior court’s approach that utilized a two-step calculation. The first is to calculate the deceased’s tax liability on his final tax return without the RRSP or RRIF proceeds reflected in the income calculation. Then, the tax liability is recalculated with the inclusion of the RRSP or RRIF proceeds. The difference between the income tax liabilities arising under each scenario becomes the beneficiary’s exposure under the joint and several liability provision for income taxes. In this case, the CRA was ordered to re-assess the two daughters’ shared liability.

There remained the issue of the daughters’ liability pursuant to their status as beneficiaries of the segregated fund. The judge undertook an extensive review of the word “transfer” and implications in respect of beneficiary designations under insurance policies. The bottom line of the judge’s review is that the CRA could not assess the daughters for their father’s income tax liability in respect of the funds they received as designated beneficiaries under the segregated fund policy. The funds received were considered life insurance proceeds payable to a named beneficiary and did not form part of the father’s estate.

Very few people like to pay taxes, and even fewer people want to pay someone else’s. Beneficiaries should be aware of the CRA’s ability to collect taxes, particularly when the funds flow directly through a RRIF or RRSP beneficiary designation.

E.O. & E.


This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.

The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.

Advocis*, the Institute for advanced financial education.

(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).

The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.

Copywrite  ISSN 0382-7038

Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

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