Using RRSP room upon death
Did you know that unused registered retirment savings plan (RRSP) contribution room can still be used at death? A key benefit of the RRSP program is the ability to carry forward unused room and use it in a future year.
It is not that unusual for someone to pass away with unused contribution room.
Canada Revenue Agency will not allow an executor to make an RRSP contribution to the deceased’s own RRSP account.
However, there are provisions to allow contributions to a spousal RRSP if the surviving spouse is under age 71 and the person that passed away still has unused room.
These contributions would be deductible on the deceased’s final tax return and could help to offset taxable income in the year of death.
This spousal RRSP contribution would need to be made in either the year of death, or in the first 60 days of the following year.
There are some additional criteria that would need to be met.
Namely, the surviving spouse would need to be a beneficiary of the estate and any split of the entitlement would need to be considered.
The estate would need to have sufficient cash on hand to make the spousal RRSP contribution and you would want to consider what impact the additional RRSP amounts would have on the surviving spouse’s future taxable income.
But for many, it could help reduce the overall taxes paid.
For example, let’s say Fred passed away in November 2017 at the age of 67 and his surviving spouse,Wilma, was 65.
Fred was still working full time and had earned a little over $100,000 in 2017.
In addition, Fred’s passing will trigger a couple of other taxable events that are unable to pass over in kind to Wilma.
Fortunately, Fred has $50,000 of unused RRSP contribution room and his estate has enough non-registered money to contribute to a spousal RRSP in Wilma’s name.
The contribution will help reduce the total tax liability his estate faces and allow a larger amount of money to pass on to Wilma once settled.
Wilma will be able to take a portion of this additional RRSP money out each year over the next 20 years or more and will therefore spread the tax liability out over a long period of time and keep her annual taxable income low.
This strategy will certainly not work for every estate and provides no benefit to a couple who are both over the age of 71.
However, it is certainly something to consider if it may apply to you or the estate of someone you are administering.
Many people have a friend or family member act as their executor.
While they likely have the best of intentions, they may not have all of the same knowledge or insight as a tax planning professional.
So, when you’re reviewing your own estate plans, which I hope you do on a regular basis, consider unused RRSP room as aworthwhile strategy.