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RRSP season: Have you planned for beneficiaries?

I've been thinking of following the example of Napoleon. No, not Napoleon Dynamite. I'm talking about Bonaparte, who died in 1821. In his will, he left instructions that his head should be shaved and his hair divided amongst his family and friends.

I told Carolyn and the kids that I was going to do the same thing. "I've been blessed to have hair, so why shouldn't you enjoy it when I'm gone," I said. "Dad, I think some money would be better," our youngest said.

And so it shall be. The family convinced me to leave my registered retirement savings plan (RRSP) assets, among other things, to them instead. Since it's RRSP season, it's worth talking about the beneficiaries of your RRSP. Who have you named to receive your plan assets when you're gone?

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Your spouse

At the time of your death you'll be deemed to have collapsed any RRSP that you have. This can create a tax bill on the full fair market value of the assets in your RRSP. Naming your spouse or common-law partner as the beneficiary of your RRSP will allow you to avoid the tax on the plan assets. In this case, your spouse or common-law partner will face the tax instead, but he or she can defer the tax on the RRSP assets by transferring those assets to an RRSP or registered retirement income fund (RRIF) for him or herself.

Your dependants

If you leave your RRSP assets to a qualifying child or grandchild who is financially dependent on you at the time of your death, you'll avoid the tax on the plan assets. The child will face the tax instead. Where the child is under 18 or has a mental or physical infirmity, he'll be able to defer the tax on the RRSP you leave behind.

For children with infirmities, the RRSP assets can be transferred to an RRSP or a registered disability savings plan (RDSP) for an eligible child, or can be used to purchase an annuity for the child, and no tax will be owing until amounts are withdrawn from his RRSP, RDSP or payments are received under the annuity. For a child who is not infirm, but is dependent because she is under 18, the RRSP assets can be used to purchase a fixed-term annuity that will make payments each year until the child reaches age 18. The child will report the payments as income in the year they're received. Make note that naming as beneficiary a financially dependent child who is over 18 and not infirm will not provide a tax-deferred transfer to that child. You'll face tax at the time of your death on your RRSP assets in this case.

Your estate

You can name your estate as the beneficiary of your RRSP. In this case, you'll face tax on your final tax return on the value of your plan assets. It's possible for your executor to make a joint election with your spouse, common-law partner, or qualifying dependent child, to make a tax-deferred transfer of your plan assets to a plan for the recipient. If your province levies probate fees, the value of the plan assets will be subject to those fees if you name your estate as beneficiary.

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Your favourite charity

Consider naming your favourite charity as the beneficiary of your RRSP. This will effectively allow you to eliminate the tax owing at the time of death on your plan assets.

Others

Naming someone other than those listed above as the beneficiary of your RRSP will cause the value of your plan assets to be taxable. As an aside, if the value of your RRSP declines after your death, but before the assets are distributed to your heirs, it's possible to carry that loss back to be applied against the taxable RRSP amount on your final tax return. For this to be possible, the final distribution of your RRSP assets will have to be made by the end of the year following the year in which you pass away.

Last points

It's possible to make a beneficiary designation for your RRSP in your will. The best advice I can give is to make sure that the beneficiaries named in the plan documentation match those named in your will. And don't forget, if you're relying on a beneficiary designation in your will, and you then go through a divorce, your will should be revised. By the way, my comments here about RRSP beneficiaries also apply to beneficiaries of your registered retirement income fund (RRIF).

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Tim Cestnick is president of
, and author of several tax and personal finance books.

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