Gifts of RRSPs/RRIFs
Retirement plan assets are one of the most heavily taxed estate assets to pass to heirs.
The recipient would normally be taxed at their highest marginal rate. However, since 2000 it has been possible to make a direct designation of an RRSP or RRIF plan to a charity (except in Quebec where a beneficiary must be a person). The charity must be named as beneficiary on the plan. On the date of death of the donor or the second spouse, the plan assets are valued for the tax receipt. This can be a portion of or the whole value of the plan. Like with life insurance proceeds, the executor will transfer proceeds directly to the charity avoiding probate. Then the estate could claim the gift up to 100% of net income in the final two tax years.
To get a further explanation on registered asset gifts, check out this PDF!
Example – Donating RRSP assets
Mrs. C wants to help her favorite charity and wants to minimize her taxes at death. She has a RRIF worth $200,000. She lives in a province with high probate fees, and she has concerns that her heirs may try and disrupt her estate plans – especially if proceeds are paid to a charity. Her financial advisor recommends naming her charity as the beneficiary of her RRSP. Here is how it would look assuming the RRIF did not change in value.
| No Designation | Designation to Charity | |
|---|---|---|
| Other Income | $250,000 | $250,000 |
| RRIF income | $200,000 | $200,000 |
| Taxable income | $450,000 | $450,000 |
| Income tax (45%) | ($202,500) | ($202,500) |
| Donation tax credit (45%) | n/a | $90,000 |
| Taxes Paid | $202,500 | $112,500 |
| Tax Savings | n/a | $90,000 |
By naming the charity as a beneficiary, Mrs. C has reduced her estimated tax bill by $90,000, reduced her probate costs, and ensured that her heirs cannot contest her intentions.
The important things to remember when donating a RRSP/RRIF are:
It is appropriate for any committed donor with RRSP/RRIF, regardless of age;
The most recently signed documents normally overrule previous instructions, so it is important that the charity be named beneficiary on plan documents and that this is outlined in the Will too;
The tax credit on the donor’s final income tax return is based on the value of the gift from the plan;
The amount of the gift creditable on the final tax return is 100% of income (not 75% like when the donor is alive);
There is a one-year carry-back if the gift is in excess of 100% final year income;
A direct designation donation can be made to a donor advised fund, like Benefaction;
The gift is not subject to probate;
It is most appropriate on the death of the 2nd spouse (due to tax free RSP rollover between spouses).[1]
[1] A Charitable Guide to Planned Giving, DeWayne Osborne, CGA, CFP, Lawton Partners Financial Planning Services Limited, 2009.
This article is not intended to convey tax and or legal advice and is for illustration purposes only. Anyone interested in the strategy should seek guidance from their financial and/or legal advisor before making a gift.