Originally published in Comments - Summer 2011

Charlie will soon celebrate his 71st birthday. It will mark a significant milestone for him and his family. While party plans ensue, Charlie wishes to ensure that the conversion of his RRSP to his RRIF best takes care of his wife Betty upon his death.

As you may be aware, an individual is required to convert his or her Registered Retirement Saving Plans (RRSP) into a Registered Retirement Income Fund (RRIF) or an annuity by the end of the year when he or she turns 71. In Charlie's case, Betty was the beneficiary of his RRSP but does not automatically continue to be the beneficiary of the RRIF. At time of conversion, Charlie would have to re-designate Betty as a beneficiary of his RRIF. Instead, and only in the case of spouses or common-law partners, Charlie has the option to name Betty as a successor annuitant instead.

Background

Generally, when an annuitant of a RRIF dies, he is deemed to have received an amount equal to the value of the investments held in the RRIF, immediately before his death. This amount and other annuity payments received from the RRIF are included in the final return of the deceased. The amount of tax that would otherwise result can be deferred if the RRIF contract or deceased's will names the surviving spouse (or common-law partner) as either a beneficiary of the RRIF or a successor annuitant. When a surviving spouse is named as a beneficiary of the RRIF, a lump sum amount will transfer to the RRIF or RRSP of the surviving spouse. However, if the surviving spouse is named as the successor annuitant, the RRIF account of the deceased annuitant continues under the ownership of the surviving spouse. The difference between the two may seem subtle, but the repercussions can be significant.

Naming the surviving spouse as a successor annuitant instead of a beneficiary of the RRIF provides the same tax-deferred rollover to the annuitant. It also results in the following additional benefits:

Timing of collapse

  • The surviving spouse directly takes over the deceased's RRIF and continues to receive the RRIF payments in place of the deceased. If the surviving spouse is named as simply a beneficiary, the RRIF will collapse, resulting in disposal of all of the investments held in the RRIF. There may be disadvantages in selling the investments because of market conditions and associated disposition costs that would occur.

Ease in administration

  • By naming the surviving spouse as a successor annuitant, the annuitant's RRIF account can be transferred to the surviving spouse by simply changing the name on the existing plan or transferring assets-in-kind to the spouse's RRIF or RRSP. No additional paperwork is required, and there is no need to execute a brand new contract.
  • In addition, the surviving spouse does not have to deal with extra reporting slips (T4-RIF). The T4-RIF identifies the amount paid from the deceased's RRIF and the amount eligible to be transferred to the surviving spouse's plan.

Payments unchanged

  • The surviving spouse may continue to receive payments based on the original terms of the deceased's RRIF. However, if the spouse was named as a beneficiary, the minimum payments must be recalculated and adjusted based on the age of the surviving spouse.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.