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But Its’ my Money!

Most of my wealth management clients have either an RRSP or a RRIF. Most Canadians know that their RRSP must be converted into a RRIF by the end of the year they turn age 71. Starting the next year they must start receiving at least 5.28% (or lower if based on the younger spouse’s age) of the RRSP as a monthly or annual income. The percentage rises gradually over each of the ensuing years.

When I discuss the projected RRIF cash flow with clients they often are already aware that on the death of the first spouse, the remaining money in the RRIF is typically transferred to the surviving spouse and there is no tax payable due to the transfer. In fact, the investments are typically transferred directly by the bank or fund administration directly to a contract owned by the survivor based on the designation of the spouse in the RRIF contract.

When the surviving spouse dies the RRIF is treated as if it had been withdrawn in full the same day by the deceased. The result: a tax bill which can be as much as 53% of the proceeds. It is then that the client says:

“But it’s my money!”

And that I reply:

The tax man says:

“You’ve received tax relief all these years on your contributions and on the earnings of your investments so now the contributions plus the accumulated growth has to be taxed as income.”

While I cannot remove the tax consequence in such cases I can discuss the use of a joint-last-to-die life insurance policy that is large enough to pay the tax on the death of the surviving taxpayer-spouse. These policies are typically much lower premium than a policy purchased on either the husband or wife. Secondly, I will recommend that investments through me or some other advisor, is enough to cover the premiums and still allow for growth.

David Juvet

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