How Saving 1.5% Can Cost Your Beneficiaries:

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RRSP Beneficiary Designations and Estate Administration Tax

The best estate planning intentions can sometimes have expensive and unanticipated consequences. Before distributing assets, the executor of an estate normally applies for a Certificate of Appointment of Estate Trustee (formerly called “letters probate”). Estate administration tax (or “probate fees”), are paid to the Minister of Finance when the application is made. The tax equals roughly 1.5% of the value of the assets of the estate. Not surprisingly, many estate planning manoeuvres focus on the reduction of estate administration tax in order to leave a larger inheritance for the beneficiaries. Unfortunately, concentrating only on avoiding a 1.5% liability can backfire when dealing with assets such as Registered Retirement Savings Plans (“RRSPs).

Using RRSP Beneficiary Designations to Lower Estate Administration Tax Liability

Certain assets are not included when calculating estate administration tax. Life insurance proceeds, tax free savings accounts, and registered plans, such as RRSPs and RRIFs, can be transferred automatically to a beneficiary named on a beneficiary designation form. If no beneficiary is designated, then that asset is paid to the estate to be dealt according to the terms of the Will, and the value of that asset is included for estate administration tax purposes. Most people are not interested in benefiting the government of Ontario at the expense of their loved ones, so beneficiary designations are often used to “shrink” the value of estates to reduce the estate administration tax payable.

Income Tax is NOT the Same as Estate Administration Tax

As discussed above, estate administration tax is payable when the executor applies for a Certificate of Appointment of Estate Trustee.

However, income taxes must also be paid in Canada when someone dies. In general terms, a deceased individual is deemed to have disposed of all of their assets at fair market value at their death. This means that, from the point of view of the tax authorities, the deceased sold everything he or she owns. Certain assets, like life insurance proceeds, normally do not attract income tax liability. However, the full value of RRSPs are included as income on the deceased’s terminal tax return (the return filed for the year of death), which can attract a hefty tax bill, especially for those who had been making regular contributions throughout their lives.

Some relief is afforded to survivors such as married or common law spouses. For example, the surviving spouse can elect with the executor of the estate to include the value of the RRSPs in his or her income. Once this is done, the spouse can then transfer the funds to his or her own RRSP and obtain a tax deduction in order to offset the income tax normally payable. This is a very common manoeuvre used to delay tax so that a greater amount of money is available for the needs of the surviving spouse.

How Focusing Solely on Estate Administration Tax Avoidance Can Derail An Estate Plan

Designating a beneficiary as the recipient of an RRSP seems like an estate planning no-brainer, especially since estate administration tax can be avoided entirely on these funds. Unfortunately, many people are so focused on saving a 1.5% tax that they fail to see how income tax liability can affect their beneficiaries:

1.    In order to defer income tax, a surviving spouse must agree to include the value of RRSPs in his or her income. There is no legal obligation for the spouse to do this. If the spouse does not make the appropriate election, the income tax is paid from the residue of the estate. This could become a major source of conflict if the beneficiary of the RRSP does not get along with the beneficiaries of the estate.


This scenario could arise, for example, in a blended family in which a testator, who may have intended simply to save estate administration tax, decided to designate his or her spouse as beneficiary of the RRSPs, but, in his or her Will, indicated that all other assets would go to children from a first marriage. After the testator’s death, the surviving spouse receives the entire value of the RRSPs (tax-free), but elects not to include the RRSPs in his or her income. As a result, the children see a reduction in their inheritance after income taxes are paid out of the estate.

2.    Although the deferral of income tax is normally not possible, designating family members (such as children) as beneficiaries under RRSPs can also result in an inequitable distribution for the same reason as above. For example, a testator, who fully intends to treat his children equally, but decides he doesn’t want his estate to pay additional estate administration tax, decides to designate one child as the beneficiary of the RRSPs, but another child as the beneficiary of the remaining estate. As in the second marriage scenario above, the child who receives the RRSPs receives them tax-free, but the beneficiary of the estate receives a smaller inheritance because of income taxes. By not taking the time to consider income tax liability before death, the testator inadvertently causes one child to finance the inheritance of the other.

Although the use of beneficiary designations to lower estate administration tax can be effective in the right circumstances, it is extremely important to take into account how income tax liability for an asset such as an RRSP can affect the actual distribution of the estate.  Consult a professional if unsure, and don’t focus solely on avoiding estate administration tax. Otherwise, 1.5% tax savings may end up costing beneficiaries a lot more in the long run.

Susanne Greisbach is an Associate with BrazeauSeller.LLP. She practices in the areas of wills, estates and tax law. Susanne can be reached at 613-237-4000 ext. 245 or For more information about Susanne, please visit

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