The largest tax bill
of your life arrives after it.

If you’re looking into what happens to an RRSP or RRIF at death, or how much tax your estate will pay in Canada, this covers what lands on the final return and what can be done about it in advance.

Most people’s single largest tax bill isn’t in their peak earning years. It’s on the final return, and they never see it.

The mechanics are simple enough that nobody questions them until it’s too late to do anything.

What happens to a RRIF at death

Whatever remains in a RRIF is generally brought into income all at once on the final return. Not spread over years. Not taxed at the rate you’d been paying. One line, one year, at whatever rate that much income attracts, which in British Columbia tops out around 53.5%.

There’s an exception worth knowing: a surviving spouse can generally roll the account over on a tax-deferred basis. So for a couple this isn’t the first death, it’s the second. The bill arrives when the last of you dies, and by then there’s nobody left to plan around it.

A $600,000 RRIF, two ways

What else lands on that return

Capital gains. Non-registered investments and any property other than your principal residence are generally treated as sold at fair market value immediately before death. Years of accumulated gains become taxable in that one year.

The corporation, if there is one. Shares of a private company are deemed disposed of too, and the interaction between the corporate and personal tax on the same underlying value can get expensive without planning.

Probate fees. In British Columbia these apply to the value of the estate passing through the will. Smaller than the income tax in most cases, but on a sizeable estate it’s a real number.

What reduces it

Drawing the registered accounts down earlier. This is the main one, and it’s why the years between retiring and 72 matter so much. Money taken at 20% during low-income years is money that doesn’t come out at 50% at the end. The full version of that argument is in the ten years that decide your retirement tax bill.

Using the TFSA last. A TFSA passes to a named successor or beneficiary without tax. It’s the most efficient thing to leave behind and the least efficient thing to spend first.

Naming beneficiaries properly. Registered accounts with a named beneficiary pass outside the estate, which avoids probate on those assets. Worth checking what’s actually on file rather than assuming.

Insurance, where it genuinely fits. A permanent policy can fund a known future tax liability with dollars that arrive tax-free at exactly the moment they’re needed. It’s not right for everyone and it’s frequently sold to people it isn’t right for, but for an estate with a large unavoidable liability it’s a legitimate tool.

Giving while you’re alive. Money given now doesn’t appear on the final return at all. The constraint isn’t tax, it’s whether you can afford it, which is a planning question rather than a generosity question.

Why it gets ignored

Because it isn’t your problem. You won’t be there, the money isn’t yours anymore, and thinking about it requires sitting with something most people would rather not.

But the amount involved is often larger than every other tax decision in retirement combined, and unlike most of them it’s entirely predictable. You can calculate it today, to within a reasonable range, and then decide whether you’d rather it went to your children or to the CRA.

General information only. Tax treatment at death depends on individual circumstances, the terms of your will, beneficiary designations and provincial rules. Confirm with your accountant and lawyer.

Common questions

What happens to a RRIF when you die?
The remaining value is generally brought into income on the final tax return in the year of death, where it can be taxed at top marginal rates. A surviving spouse can usually receive the account on a tax-deferred basis, which defers the tax to the second death.

How much tax does an estate pay in Canada?
There is no estate tax in Canada, but there is tax on the final return. Registered accounts are brought into income, non-registered investments and property other than a principal residence are treated as sold at fair market value, and probate fees apply in most provinces.

Is a TFSA taxed at death?
A TFSA generally passes to a named successor holder or beneficiary without tax on the value at death. It is the most tax-efficient asset to leave behind and the least efficient to spend first.

How can I reduce the tax my estate pays?
Drawing registered accounts down during low-income years, naming beneficiaries on registered accounts so they pass outside the estate, giving while you are alive, and in some cases using permanent insurance to fund a known liability.

Does naming a beneficiary avoid probate?
Registered accounts with a named beneficiary generally pass outside the estate and avoid probate on those assets. It is worth confirming what designations are actually on file rather than assuming.