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Choose the right beneficiary for your RRSP

It's good to see that Canada is helping the United States in this war against terrorism. We're doing our best. From what I understand, we've pledged five battleships and 2,500 troops. The only problem is that, after the Canada-U.S. exchange rate, the United States is left with just one canoe and two Mounties. Hey, the Americans are family. We'll give them everything we've got.

What about you? Are you planning to leave your own family with everything you've got? Let's talk specifically about the beneficiaries of your registered retirement savings plan or registered retirement income fund.
Your spouse

If you're married or living in a common-law relationship, you've got to consider naming your spouse (or partner) as the beneficiary of your registered plan. This generally makes the most sense. Why? A continued deferral of tax.

When you leave your registered plan to your spouse, those assets can move to his or her plan and will allow you to avoid paying tax on those assets on your final tax return. There's more good news at the time of your death (if you know what I mean): Your spouse has up to 60 days following the year of your death to make the transfer to his or her own registered plan.
Your kids

If you leave your RRSP or RRIF to a child, the full value of your plan assets will be taxed on your final return. There are two exceptions.

The first is by leaving your registered plan to a child or grandchild who was financially dependent on you at the time of your death as a result of a mental or physical infirmity. In this case, your plan assets can be transferred to an RRSP, RRIF or annuity for that child. You'll avoid tax on your final return.

The second situation is where the child is a minor who is financially dependent on you. In this case, the child will be eligible to buy an annuity to age 18 with your plan assets. This means that your minor child will have to report taxable income from those assets over the years up to age 18.

Who is financially dependent? The tax man will assume that a child is not financially dependent if his income for the year prior to your death was greater than the basic personal amount ($7,634), unless you can prove otherwise.
Your estate

Does it ever make sense to name your estate as the beneficiary of your RRSP or RRIF? Sure. Suppose, for example, that you have significant unused capital losses expected in the year of death, or other tax deductions or credits in that year.

In this case, it will likely make some sense to ensure you have enough income reported in the year of your death to use up those losses, deductions or credits. Capital losses can generally be applied to offset any type of income in the year of death, not just capital gains.

This is where having part of your RRSP or RRIF taxable in the year of death could actually be to your benefit. Consider a situation I ran across recently where a client had $75,000 in capital losses, deductions and credits available in the year of his death. He had an RRSP worth about the same.

Because his death was expected, he managed to change the beneficiary of his RRSP to be his estate. The $75,000 RRSP was taxable to him in the year of death, but no tax was paid because of the losses, deductions and credits available to him.

The bottom line? Those RRSP assets became non-registered in the year of his death with no tax hit.

It may also make sense to name your estate as beneficiary of your RRSP if you hope to leave just a portion of those assets to your spouse, and the rest to, say, your kids.

This type of planning will take a visit to a tax pro.

Keep in mind, leaving your registered plan to your estate will result in probate fees -- a price you may be willing to pay to accomplish other objectives.
Your charity

Finally, thanks to the 2000 federal budget, you'll actually enjoy some tax relief in the form of a donation credit on your final tax return if you name your favourite charity as the beneficiary of your RRSP or RRIF. The charity will get those assets when you're gone, and you'll wipe out the tax hit on those assets.

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