An insurance company can pay off your RRSP tax bill when you pass

BY FAZAAD BACCHUS

One of the largest tax bills a person can have is the taxes payable on their RRSP balance upon death. If you haven’t made provisions to pay it off, it will be taken off your RRSP balance, leaving your intended beneficiaries with a lot less that they thought they would receive. How do we tackle this problem so that we do not give CRA almost 50% of what’s in our RRSP? Is there a way an insurance company can pay it off for me?

First of all, let’s talk about the RRSP. As you know it’s a registered retirement savings plan, you save, and you are entitled a reduction in your taxes payable for the given year in which you contribute. The amount you contribute is based on a formula or based on the contribution room indicated on your notice of assessment. It is expected that the tax reduction you enjoy is greater that the tax payout at retirement.

All of your contributions grow tax deferred and all the compounding growth takes place tax deferred. You can choose to move your RRSP investment from one company to another for the simple reason that you can make a better return and it will transfer on a tax-sheltered basis. Choosing to invest with a financial advisor typically earns you approximately 3% more than your average bank branch, due to the fact that someone is actually looking at your account regularly and has a vested interest in its growth.

Upon retirement when you begin withdrawals, it will be taxed as income and added to your CPP and OAS to for an overall calculation. The better your investments do, the more money you will have in retirement, but there is a problem with too much money sitting in RRSP or RRIF especially when a client is getting older.

When one spouse passes away, the registered investments pass to the other spouse on a tax-sheltered basis or on a tax-free rollover basis. However, upon the death of the second spouse, these funds do not pass to children (unless infirmed) on tax free basis. Consider an aged person with $300,000 in total RRSP/RRIF who passes away and is leaving this money to children, there is a tax bill of approximately $150,000 owing to CRA on this money. If the person passes away and has other property it all gets added up and it can be a hefty bill.

One solution and the most cost-effective solution is to have an insurance company pay off your tax bill for you. The policy is taken on the lives of both spouses, and the sum assured is paid when the second person dies, and the taxes become due. The policy is paid from the RRSP itself and the premium stops on the first death. This policy is known as a Joint Last to Die policy and could save you a hefty tax bill. If you would like to know if it can work for you, please drop me a line.