Death + Taxes

My 90 year-old father passed away recently and it has been a struggle to wade through the 

bureaucracy required to ensure that my mother receives her survivor's share of his CPP and government work pension.  It may take months before everything is sorted out and she finally starts receiving the full amount of payments to which she is entitled.

This led my husband and I to take a closer look into what would happen to our retirement portfolio when one of us dies.  This portfolio is made up of RRIFs, TFSAs, a joint non-registered investment account and joint bank accounts. We want to ensure that we are structured in such a way to allow the surviving spouse to minimize probate and deemed disposition taxes, as well as reduce administrative delays that would temporarily limit access to our money.

Probate is the process of obtaining court certification of the validity of your will and the legal authority of your executor to represent your estate.  The fee or tax of probating a will could be as high as 1.5% of the estate.  Two recommended ways of avoiding probate taxes include making your non-registered accounts joint, and ensuring that your registered accounts have designated beneficiaries. 

These were steps that we had already taken when we first set up all of our investment accounts with our discount broker Scotia iTrade.  Our non-registered account is set up as "joint tenants with right of survivorship", meaning that assets are automatically passed on to the surviving joint owner and are not subject to probate tax.  We named each other as beneficiary when setting up our RRSPs, RRIFs and TFSAs, so that the value of these accounts will be excluded from the estate for probate purposes, and will be paid directly to the beneficiary.

By doing deeper research on this topic, we learned that for spouses (including common-law), it is even better to designate each other as the successor holder (for TFSAs) or successor annuitant (for RRIFs only, not RRSPs), rather than beneficiary.  Upon death of the owner, all rights to the registered account transfer to the successor, with the account and all its tax-sheltering benefits remaining intact. 

In the beneficiary scenario, the account would have to be closed with the investments inside liquidated and transferred as a lump-sum to the beneficiary.  This involves a time-consuming process of filling out forms and could result in an interruption in the flow of income from the account until the administrative details are sorted out.  There would also be costs involved in disposing and reacquiring investments, as well as worrying about adverse market conditions at the time of the purchase or sale.  There might be a possibility to transfer shares "in-kind", but that would probably involve even more paperwork.

In the case of the TFSA, the beneficiary could make a one-time "exempt" contribution of the funds to his own TFSA, but would need to worry about timing of the contribution, not exceeding his and the deceased person's contribution room for the year, and other rules and potential tax implications. 

In the RRIF beneficiary scenario, the originally specified RRIF payment rules would terminate and need to be recalculated for the surviving spouse, using his age to determine the minimum payment.  If the survivor is the older spouse, he loses the advantage of using the age of the younger spouse to set the minimum payment.  There could possibly be an interruption in RRIF payments while this is being sorted out.

By contrast, the successor route requires a simple name change on the existing account.  The payments for a RRIF would continue uninterrupted, based on the terms originally set up for the account.  After taking over ownership of the deceased's TFSA account, the successor holder is still subject to his own personal contribution limitations, but could contribute either his own or the TFSA of the deceased.  He can also choose to merge the funds into his own TFSA account.  

Now that we know about this differentiation, the successor option is clearly preferable since from a logistics perspective, the successor option seems much simpler than the beneficiary one.  It is concerning that we had never even heard of these terms prior to our recent investigation.  It makes me wonder what other useful tax conditions or situations are we unaware of. Once we thought to look, there is plentiful information on the internet on this topic, but how do you know to look for something that you have never heard of?

For our RRIFs and TFSA accounts that were already set up with beneficiaries, we visited the Scotia iTrade office to fill out the request forms for changing this to successor annuitant and successor holder respectively.   For our remaining locked in RRSPs (LIRA) which we cannot collapse until at least age 55, we will now know to select the right option when converting them to locked-in income funds (LIF).

While in the iTrade office, we confirmed that our non-registered joint account was indeed set up as "joint tenant with right of survivorship" and then asked what would happen when one joint owner died?  We were told that the joint account would be closed and a new account opened with the single remaining owner.  It would take between 5-7 business days to create the new account, but we were assured that the surviving joint owner would still have access to the original account during this period.  Despite this assurance, we made note that it might be wise to withdraw some spending money prior to reporting the death, just in case. To start the process of turning the joint account into a single account, the survivor would need to provide the death certificate plus a letter of direction.

Finally we looked into how deemed disposition rules for the final income tax filing of the deceased would affect our joint non-registered account.  Usually upon death, an account owner is deemed to have disposed of his investment assets at fair market value and would be subject to capital gains tax if applicable.  In our case, having a joint account plus the rules for transfer of assets to spouse will help defer capital gain taxes until the death of the second spouse.  When the joint account is turned into a single account for the remaining spouse, the assets can be transferred at book value (the price at which each asset was originally purchased) which results in no capital gains or losses.  For those who have more losses than gains in their investment account, you can alternately request for the transfer at market value in order to trigger capital losses to apply against future capital gains.  Hopefully we won't be in this situation.

At some point, we need to take the final step of creating a will that determines what happens to our estate if both of us die together.  Having a will also makes it easier to apply for death benefits from Service Canada, as there is much more administration involved to recoup funeral expenses if there is no estate.  For now, we seem to have set ourselves up to ease the transition for the surviving spouse, if and when one of us dies.