Your surviving spouse will then become owner of the RRIF for all purposes. All subsequent payments and withdrawals are taxable as income to your spouse. Any capital remaining at your spouse's death will be added to his or her final tax return (unless he or she has remarried and named a new spouse as beneficiary.)
Without this designation, you spouse will not be able to continue the RRIF and the carrier is required by law to pay out all monies remaining in your RRIF at the time of your death. If the RRIF proceeds pass to your spouse, the minimum income pay-out for that year will be included in your terminal tax return and the excess will be taxable to your spouse unless he or she elects to have the carrier transfer the funds directly to another RRIF or RRSP using a T2030 form.
As long as there is no surviving spouse, a dependent child or grandchild who is under age 18 at the time, may transfer the RRIF proceeds into an annuity for the number of years, (including partial years), that remain until the child turns 18. The tax liability for the child is thereby spread over the intervening years. The annuity must be acquired before the child is 18 and within sixty days following the year the RRIF proceeds are received. The payments under the annuity may be received by the child or by a trust set up solely for the benefit of the child.
A child or grandchild of any age who was dependent on you by reason of physical or mental infirmity (and there is no surviving spouse), may transfer the proceeds of your RRIF within the year, or sixty days thereafter, to his own RRSP or a Registered Annuity or RRIF. Any subsequent withdrawals will be taxable in the hands of the recipient and may qualify as pension income for the Pension Tax Credit.
Given the amount of tax involved, it only makes good sense to ensure that your RRIF proceeds will qualify for any deferral of tax when being transferred to your heirs. Therefore make sure that the intended recipient is clearly identified by being named as the beneficiary of your RRIF if it is with a life insurance company, or a bank or trust company that allows you to name a beneficiary. Where there is no provision for naming a beneficiary in the RRIF, a clause or codicil can be added to your will stating that your RRIF is to be kept separate from the rest of your estate and is to be transferred directly to the desired heirs.
It is also a good idea to include a provision in your will that any taxes for your RRIFs are to be paid by the recipients rather than your estate. Most wills require that all taxes be paid prior to distribution of the assets and a large tax bill for the RRIF could mean that there may be little left for your other heirs. The fact that there are no withholding taxes on RRIF payments at death simply exacerbates the problem.
For example, if you were planning to leave your $200,000 home to your daughter because you have named your son as beneficiary of your $200,000 RRIF, your executor might have to sell or mortgage the house in order to pay the $100,000 of income tax for the RRIF if there are no other liquid assets available. In addition to income tax, there is also the problem of probate fees. Whether or not your estate will have to pay probate fees on your RRIF assets will depend on how they are transferred to your heirs. Probate fees also vary from province to province. For example, there are no probate fees, as such, in Quebec if your will is a notarial will. If your will is a holograph or an English for will, probate fees will apply. In Ontario there is a charge of $5 per $1,000 on the first $50,000 and then $15 per thousand on the balance of your estate with no maximum.
Probating your estate, which is where the fees come in, involves having a court certify that your will is valid and that distribution of your estate can be made without risk to the transferring parties. Normally banks, trust companies and stock brokers will insist on a copy of the probated will before transferring RRIF assets to your heirs.
If your will is used to designate the beneficiary of your RRIFs, then the proceeds will pass through your estate and will be subject to probate. Some trust companies and banks have a provision for naming a beneficiary in their RRIFs but such designations are not recognized in all provinces.
In summary, if you have named your estate as beneficiary or your RRIF is not with a life insurance company, then there is every possibility that probate fees will have to paid. However, with proper planning, not only will you save on probate fees, you can defer substantial amounts of income tax as well. Furthermore, you will have the peace of mind of knowing that your RRIF capital will definitely be going to the person you have chosen and there will be no unintentional consequences for your remaining heirs.
E&OE