I’d like to state for the record – and not just because the taxman may be reading this – that the old saw about the inevitability of death and taxes is unfair to the Canada Revenue Agency. They’re just doing their job!
It’s doubly unfair because death tends to be final, but the CRA offers avenues of reprieve for some Canadians at tax time. A reader e-mail raised the question this week of why those avenues are not more widely available.
First, a quick addendum to last week’s column on finding fee-only financial planners. While the Financial Planning Association of Canada’s site I mentioned lets you search a broader database for fee-only services, the website adviceonlyplanners.ca is a more focused starting point if you’re looking specifically for fee-only or advice-only planners. Thanks to Chris Merrick, principal and fee-only financial planner at Merrick Financial in Toronto, for pointing that out.
Are you dragging your feet on filing your taxes?
Why does the CRA only allow certain registered accounts to be rolled over on a tax‑deferred basis to spouses or dependents? It seems prejudicial that a single person with no children cannot designate a successor annuitant.
The successor annuitant designation you mentioned only applies to an RRIF, and lets a survivor take over the account directly after their spouse or common-law partner’s death. That’s different from – and easier than – designating a survivor as a beneficiary, which entails rolling over assets from the deceased’s account into a survivor’s RRSP or RRIF, with taxes deferred until withdrawal. Taxes can also be deferred if a dependent has a Registered Disability Savings Plan.
It’s possible to reduce the tax burden for other dependent children or grandchildren by transferring RRSP or RRIF funds into an annuity. If you’re interested, RBC Wealth Management put out a comprehensive guide a few years ago called Estate Planning for your RRSP/RRIF that you can find online.
For TFSAs outside of Quebec, you can designate a spouse or common-law partner (not a dependent) as a successor holder, which permits a straightforward postmortem transfer of the account’s ownership. The CRA is clear that as long as the deceased didn’t overcontribute to their TFSA, this won’t affect contribution room on the successor holder’s existing TFSA. They would just have two separate TFSAs.
Analysis: This will be a make-or-break tax season for the Canada Revenue Agency
So, why do families get all the perks? It’s a good question in a country where marriage rates have been falling steadily and just under a third of women aged 20 to 49 say they “definitely” or “probably” don’t want to have kids.
“The whole fairness debate on spouses versus singles in Canada is really kind of a byproduct of how generous our tax deferral system is,” said Christine Dimitrov, an estates lawyer in Vancouver. “In countries like Sweden, for example, where savings are taxed more continuously throughout their lives, there’s less need to draw lines between spouses and singles.”
Ms. Dimitrov said Canada’s rules are based on a view of families as an economic unit, and added that people frequently miss that rollovers are designed to defer, not eliminate, taxes. There is little indication these rules are likely to change.
Allowing a spouse or partner to take over an RRSP or TFSA reflects a recognition that the wealth contained within an account hasn’t changed hands in an economic sense outside the family unit, she said. A family’s financial obligations are likely to continue after the death of a spouse, and dependents may not be able to earn income.
“Tax only applies when it leaves that economic unit ... If you’re a single person, you are that economic unit. It’s not a love bonus – it is just timing.”
Yes, AI can help you with your taxes – if you know how to use it
Rollovers may be off-limits, but other strategies can help single people reduce the burden on their estate. Ms. Dimitrov said an RRSP meltdown strategy can be one tax-efficient choice. This means gradually withdrawing funds from an RRSP over time while in a lower tax bracket and reinvesting in another tax-efficient vehicle such as a TFSA (contribution room allowing). If planned appropriately and executed properly, it can help avoid a large tax bill at death.
Another option may be better still: Charitable giving.
“For single people, for long-term tax efficiency, I do truly feel that philanthropy is often underutilized,” Ms. Dimitrov said.
By naming a charity as a beneficiary for an RRSP or RRIF, you can still pull out what you need to enjoy your retirement. Funds left over at your death will go to the charity you named and can be used to offset taxes triggered on the RRSP or RRIF at death.
Charitable giving can take different forms and can be an attractive option for everybody – “not just singles,” said Ms. Dimitrov. Just make sure your approach comes out of proper planning and suits your individual circumstances.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.