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BENEFICIARY DESIGNATION

  1. What is Beneficiary Designation?
  2. What plans provide for beneficiary designation?
  3. Is beneficiary designation available on registered plans and insurance products, as outlined in Question 2, in all provinces?
  4. How do I know which jurisdiction's rules govern a particular client's pension plan?
  5. Why is beneficiary designation so important?
  6. Is beneficiary designation important in Quebec?
  7. Does direct designation of a beneficiary under a plan mean that the deceased will not be taxed on the plan proceeds upon death?
  8. Is it always best to designate a beneficiary under a plan that allows it?
  9. What happens if a client makes a designation of beneficiary while a resident of one province and then dies while resident in another province?
  10. Will Investors products to which I designate a beneficiary have special protection against claims from my creditors?
  11. Can a Quebec resident purchase a non-seizable annuity?
  12. May I designate a beneficiary under an RRSP distributed by Investors Group? Another company?
  13. Is there any difference in beneficiary designation under trusteed RRSPs and insured RRSPs?
  14. What kind of RRSPs does Investors Group offer - trusteed or insured?
  15. Who may I designate as my RRSP beneficiary?
  16. May I designate my unborn child as my RRSP beneficiary?
  17. May I designate more than one individual as the beneficiary of my RRSP?
  18. May I designate an alternate beneficiary under my RRSP?
  19. If I name more than one RRSP beneficiary, may I, under that RRSP, indicate the portion (%) each will be entitled to?
  20. If I designate my spouse as beneficiary, and I die still holding the RRSP, what are my surviving spouse's options?
  21. If I name my estate as beneficiary, what are my surviving spouse's options, should I die holding the RRSP?
  22. Will all of the RRSP amount be eligible for the "Refund of Premiums" rollover?
  23. Is my surviving common law spouse eligible for the Refund of Premiums Treatment?
  24. What is the definition of common law spouse?
  25. If I designate my child or grandchild as my RRSP beneficiary, what happens upon my death if I have a surviving spouse?
  26. If I designate my child/grandchild as my RRSP beneficiary, what happens upon my death if I do "not" have a surviving spouse?
  27. If I designate my estate as my RRSP beneficiary, then die with no surviving spouse but with a dependent, infirmed child/grandchild, may the executor elect to have the Refund of Premiums rollover (to RRSP) apply?
  28. Are the rules mentioned in the previous questions the same for Group RRSP members?
  29. What if I die holding a locked-in RRSP? A LIRA? Do the same rules apply with respect to these assets as has just been described for a regular RRSP?
  30. What are my surviving spouse's options on my death if he/she has been designated as "successor annuitant" or "beneficiary" to my Investors RRIF?
  31. Do payments under a RRIF to a surviving spouse qualify as "refund of premiums"?

Appendices

  1. LIFs, LIRAs and Locked in RRSPs (from February 17, 1995 issue of Sales Bulletin)
  2. Quebec Designation of Beneficiary (Advanced Sales Memo dated May 19, 1995)
  3. Creditor Protection on Insurance and Investment Products (from January 16, 1996 issue of Sales Bulletin)

1. What is Beneficiary Designation?

"Designating a beneficiary" means that you have written instructions with the financial institution left holding certain assets (such as an RRSP or RRIF) as to who will get the account on your death. This is an alternative to leaving instructions in your will for the disposition of your assets. A direct designation of beneficiary can only be made on certain assets. With a direct designation of beneficiary, the asset does not generally form part of the deceased's estate to be probated and distributed by the executor. In these materials, we will use the term "designation of beneficiary" to refer to the direct designation outside of a will.

2. What plans provide for beneficiary designation?

Clients can directly designate their beneficiaries under the following registered plans:

Please note that some life insurance companies are part of a corporate group which may include a trust company. Oftern the companies in such a corporate group will have similar names. A beneficiary designation can only be made in regard to the non-registered products sold by the insurance company in such a corporate group. A beneficiary designation cannot be made in regard to the non-registered products sold by any company in the group that is not a life insurance company (for example a product sold by a trust company). Similarly products issued by such related companies will not be afforded the same creditor protection as products issued by the life insurance company.

3. Is beneficiary designation available on registered plans and insurance products, as outlined in Question 2, in all provinces?

Yes, although the rules have varied between provinces from time to time in the past. In particular, the Civil Code in Quebec did not recognize direct designations of beneficiaries on non-insurance products until recently.

The new Civil Code, which came into effect on January 1st, 1994, recognized the designation of a beneficiary to certain trusteed plans in limited circumstances. Changes to Investors plan documentation were made and approved by Revenue Canada and Revenue Quebec in May of 1995. Quebec clients who purchase RRSPs, RRIFs and LIFs from Investors can designate beneficiaries to these accounts. Those Quebec clients with existing RRSPs, RRIFs and LIFs can designate a beneficiary by completing the special instructions area on an application form. See the Advanced Sales memo dated May 19, 1995 which is attached as Appendix A to this section for detailed information on Quebec Designation of Beneficiary.

4. How do I know which jurisdiction's rules govern a particular client's pension plan?

The pension plan is governed by the laws of the jurisdiction under which the pension benefit was earned. The jurisdiction could be the province in which the client worked or the federal jurisdiction. The Pension Benefits Standards Act ("PBSA"), which is a federal statute, covers private company pension plans for industries or undertakings which are regulated by federal law. This includes the following:

For more information and examples, see the article entitled "LIFs, LIRAs and Locked in RRSPs" which appears as Appendix A in this section.

5. Why is beneficiary designation so important?

Designation of beneficiary, where available, can mean, in some cases:

*This is not necessarily the case in Manitoba and Ontario, where courts have decided that account proceeds still might be available to creditors of the estate where there is a designation of beneficiary and implied that the assets should be included for probate purposes. We understand that there is confusion about whether these assets should be included in the inventory of the estate for probate purposes and that many lawyers still do not include these assets in the inventory of the estate for probate purposes unless the executor of the estate or the creditors make a claim against the account to satisfy the claims of creditors, but we cannot state with certainty that this practise is followed universally in Manitoba and Ontario. Ultimately, the decision to include the assets should be made by the executor/executrix on the advice of his/her lawyer based on the law in effect at that time. It is also possible in Manitoba and Ontario that the issuer of an RRSP to which there is a designated beneficiary may ask for probate to obtain protection against claims from potential creditors. It is not currently Investors practice to ask for probate if there is a designated beneficiary, unless the executor of the estate or creditors make a claim against the account. The principle that account proceeds may be available to creditors of the estate is likely not limited to Manitoba and Ontario and could possibly be applied in any province other than Prince Edward Island. Prince Edward Island has legislation specifically granting creditor protection to RRSP's of any type (not just insurance products.)

6. Is beneficiary designation important in Quebec?

One of the main reasons for making a direct designation of beneficiary is to obtain the account proceeds without waiting for probate and to avoid the payment of probate fees on the value of the account. In Quebec, the majority of wills are in notarial form and do not need to be probated. For wills that do require probate in Quebec, probate fees are quite inexpensive (the current charge is a flat fee of $64). As a result, there is less financial incentive to a Quebec resident to make a direct designation of beneficiary. However, we understand that the time for settlement of Quebec accounts may be slightly reduced if there is a direct designation of beneficiary, so Quebec clients may prefer to make a direct designation of beneficiary for this reason.

7. Does direct designation of a beneficiary under a plan mean that the deceased will not be taxed on the plan proceeds upon death?

It can depend on what the plan is, who is named beneficiary, etc. See the specific product beneficiary information that follows.

8. Is it always best to designate a beneficiary under a plan that allows it?

It depends on the client's circumstances. See the specific product information.

9. What happens if a client makes a designation of beneficiary while a resident of one province and then dies while resident in another province?

Because all provinces allow for the designation of a beneficiary, the designation will be enforceable.

10. Will Investors products to which I designate a beneficiary have special protection against claims from my creditors?

Generally not. Creditor protection is a complicated area and one in which you must be very careful with your comments. The protection that is available depends on the product and the interaction of federal and provincial legislation. For example, employer-sponsored registered pension plans are exempt from seizure to satisfy the claims of creditors of the employee, whether or not there is a designated beneficiary, except for additional voluntary contributions in British Columbia, Alberta, Quebec and Saskatchewan, which are not treated the same as regular pension plan contributions. Locked-in RRSP's and Life Income Funds that hold monies from pension plans are treated the same as registered pension plans. Insurance contracts may have some protection under the insurance legislation of each province, provided that the designated beneficiary is an immediate family member (spouse, child, grandchild or parent) or that another person has been irrevocably designated as beneficiary (note that the protection under the insurance legislation does not extend to non-insurance products, such as mutual funds that happen to be sold by insurance agents). But non-locked-in RRSP's that are invested in non-insurance products have no special protection (except in Prince Edward Island, where there is legislation extending creditor protection to all RRSP's). Note that, under the federal Bankruptcy and Insolvency Act, it is possible for creditors to attack the transfer of assets to a registered pension plan, an RRSP in Prince Edward Island or an insurance policy if the transfer to the product occurred within one year of bankruptcy (and sometimes if the transfer occurred within five years of bankruptcy, if the creditor can establish that the account holder was insolvent at the time of transfer and made the transaction for the purpose of defeating creditors). As a result, the best advice you can give is to tell those clients who are concerned about creditor protection to check with their local lawyer for legal advice. See the article entitled Creditor Protection on Insurance and Investment Products from the January 16, 1996 issue of the Sales Bulletin, which is attached as Appendix C to this section, for more information on creditor protection.

11. Can a Quebec resident purchase a non-seizable annuity?

There is legislation in Quebec which suggests that funds constituting fixed term annuities that are issued by trust companies may not be seizable by creditors of the owner, if certain conditions are met. We have been advised by legal counsel in Quebec that the actual creditor protection afforded to these contracts is uncertain and may be open to challenge. As a result, Investors does not feel sufficiently confident to offer such a product as though it would be creditor protected.

12. May I designate a beneficiary under an RRSP by Investors Group? another trust company?

You may designate a beneficiary on an RRSP distributed by Investors Group. (Note the prior comments in this section on Quebec). Whether a designation will be accepted on an RRSP trusteed by another institution depends on the policy of and legislation governing that institution.

13. Is there any difference in beneficiary designation under trusteed RRSPs and insured RRSPs?

Yes. Insurance products are covered by different legislation and a designation of beneficiary can be made to any insurance policy, whether it is registered or not, in all provinces. An irrevocable beneficiary can be designated to an insurance product. When a beneficiary is irrevocable, the RRSP owner cannot change the RRSP investments or make a withdrawal without the irrevocable beneficiary's approval.

14. What kind of RRSPs does Investors Group offer - trusteed or insured?

Only trusteed RRSPs are issued by Investors Group, not insured RRSP's.

15. Who may I designate as my RRSP beneficiary?

Anyone you wish - a minor or adult, a resident or non-resident, your estate, a trust, etc. However, there are income tax consequences associated with your choice of beneficiaries. The value of your RRSP as at the date of death is included in your terminal return and is taxable in the year of death, unless you have a surviving spouse and the surviving spouse is entitled to receive the RRSP by virtue of your will or a designation of beneficiary, or unless you have no surviving spouse and have left your RRSP (directly or through your will) to a child or grandchild who was financially dependent on you. See questions 20 through 27 in this section for more details.

16. May I name my unborn child as my RRSP beneficiary?

No. Only a living person, with the full name provided, can be designated as a RRSP beneficiary directly under the plan. Your will can provide for unborn beneficiaries.

17. May I designate more than one individual as the beneficiary of my RRSP?

Investors will accept the designation of multiple beneficiaries if a client wishes to make such a designation. However, there is some legal question as to whether a designation of more than one beneficiary to an RRSP, other than by will, is valid. This is because legislation allowing designations outside of the will says a planholder may designate "a person" as a beneficiary and the issue is whether a designation of more than one person is valid. To our knowledge, this issue has not been tested in the courts. A test case could arise if the designated beneficiaries are not the same people who inherit the deceased's estate under the will, and the beneficiaries under the will decide to challenge the right of the designated beneficiaries to the RRSP account. Clients should be aware that, to be certain this type of designation will not be challenged, it should be made or repeated in their wills.

18. May I designate an alternate beneficiary under my RRSP?

Investors will accept such a designation if the client wishes to make it. But there is sufficient uncertainty over whether the legislation is broad enough to allow this that we recommend clients make or repeat these designations in their will.

19. If I name more than one IG RRSP beneficiary, may I, under that RRSP, indicate the portion (%) each will be entitled to?

Investors will accept such a designation if it is clear from the designation how we are to settle the account on the death of the owner. However, because there is some question as to whether the designation could be successfully challenged, and because it is often difficult to specify clear instructions that cover every eventuality (such as what is to happen if one of the beneficiaries predeceases the account holder), we recommend that this type of designation be made in the client's will.

20. If I designate my spouse as beneficiary, and I die still holding the RRSP, what are my surviving spouse's options?

Your surviving spouse's options are:

  1. Take the lump sum (no withholding tax) in cash. The surviving spouse will receive a T4RSP and is taxed on the lump sum in the year of receipt. This amount is called a "refund of premiums". Only upon filing the tax return will the surviving spouse have to pay the tax owing. The estate cannot directly pay the surviving spouse's tax bill. The estate pays the deceased's tax bill. Assuming that the surviving spouse inherits some or all of the residue of the estate, only then would the released monies be available to pay the surviving beneficiary's tax bill.
  2. The designation of a beneficiary will generally result in the proceeds avoiding probate fees because the RRSP assets go directly to the surviving spouse, rather than forming part of the deceased's estate, which must be probated. (Note the previous comments in Question 5 on the situation in Manitoba and Ontario.)
  3. Transfer the refund of premiums to the surviving spouse's RRSP, RRIF or annuity. The payment must be made in the year of receipt of the refund of premiums or within 60 days after the end of that year. No form is needed for the transfer. A tax payment certificate will be issued for the contribution and the surviving spouse will use it and Revenue Canada Form T2097 to claim the deduction when filing his/her personal tax return.
  4. Combination of a) and b) above.

21. If I name my estate as beneficiary, what are my surviving spouse's options, should I die holding the RRSP?

  1. Unless action is taken by the executor/executrix of the will, the deceased shall be taxed on the full amount of the RRSP. A T4RSP is issued in the deceased's name in the year of death and must be declared on the deceased's tax return. The RRSP assets form part of the deceased's estate so do not avoid probate fees.
  2. If the executor of the deceased's will and the surviving spouse instead complete Revenue Canada Form T2019, they can elect to have some or all of the RRSP amount either:

*Because the estate was the beneficiary of the RRSP, the executor must include the amount in the deceased's assets to be probated.

Note: It is sometimes appropriate to refrain from electing T2019 Refund of Premiums treatment in respect of all of the RRSP proceeds (where the estate has been named beneficiary). Some of the RRSP proceeds may be left to be taxed in the deceased's hands if the deceased's personal, age, pension or other credits can be used to eliminate any tax that would otherwise be paid by the deceased in respect of the RRSP proceeds.

22. Will all of the RRSP amount be eligible for the "Refund of Premiums" rollover?

It depends. The maximum RRSP value that can be transferred to the surviving spouse's RRSP or RRIF is either

  1. the value at the moment of rollover; or
  2. the value at December 31st of the year following the year the RRSP owner died; plus or minus the non-taxable portion of capital gains or losses realized after December 31st of the year following the year of death.

whichever occurs first.

Example:

The rollover amount is $50,000 (if unit value @ payout was equal to unit value @ 12/31/94).

$500 is taxable to the deceased's estate ($50,500 minus $50,000).

Note: If the estate is the designated beneficiary, and the executor and the surviving spouse elect with the T2019 to have only a portion of the RRSP amount receive Refund of Premiums rollover treatment, the calculation is as follows:

To determine the amount included in the deceased's hands:

Example:

  • At Death January 15/93 RRSP Amount
  • December 31/94 Value
  • February 1/95 at Distribution
  • T2019 Election Amount
$40,000

$49,000

$50,000

$30,000

$40,000 minus $24,000 equals $16,000

$16,000 is the amount included in the deceased's hands on his/her final tax return
$30,000 is the Refund of Premium rollover amount
$46,000  

($50,000 - $46,000) = $4,000 is taxable to the deceased's estate

23. Is my surviving common law spouse eligible for the Refund of Premiums Rollover?

Yes.

24. What is the definition of common law spouse?

A common-law spouse is a person of the opposite sex who at the time of death:

  1. was living with the RRSP owner in a common-law relationship and is the natural or adoptive parent of their child, or
  2. was living with the RRSP owner in a common-law relationship and had, at any time, been living with the RRSP owner for at least 12 continuous months (in calculating the 12 continuous months, include any period of separation of less than 90 days).

25. If I designate my child or grandchild as my RRSP beneficiary, what happens upon my death, if I have a surviving spouse?

If you have a surviving spouse, the child (dependent or not, infirmed or not) will receive the total RRSP amount ( no withholding tax), but the value of the RRSP will be included on the deceased's terminal tax return. The Refund of Premiums treatment cannot be elected, unless in the rare circumstance where a spouse has not been appropriately provided for under dependent relief or family property legislation, and has appealed to the courts for an adjustment to the division of the deceased's assets. Where the adjustment involves the RRSP assets, the child beneficiary may lose some or all of the entitlement. In such a case the estate representative and surviving spouse may be able to elect (using T2019) Refund of Premiums treatment. Where special cases such as this are involved, the circumstances surrounding the case and interpretation by the court would play a major role in the final outcome.

26. If I designate my child/grandchild as my RRSP beneficiary, what happens upon my death, if I do not have a surviving spouse?

If the child/grandchild was financially dependent** on the deceased, the child/grandchild can receive the monies either:

  1. in one lump sum (taxable in the hands of the financially dependent child/grandchild, but no tax will be withheld by the RRSP carrier), or
  2. if under 18 years of age, in equal annuity payments for a term not to exceed 18 minus the child's age at the annuity purchase date. The annuity must be purchased within 60 days after the end of the year in which the monies are received. (This is also referred to as a Refund of Premiums but no rollover is permitted to the child or grandchild's RRSP.) The financially dependent child is taxed on the monies received, not the deceased. The child would report the RRSP proceeds as income and claim an offsetting deduction equal to the amount transferred to the annuity.

Note: The annuity purchased would be a non-registered annuity. Therefore, you must advise Investors that special reporting is required as the total payment (principal plus interest) is taxable to the child.

If the dependent child/grandchild is mentally or physically infirmed, the child/grandchild can have refund of premiums "rollover" treatment so that the RRSP assets directly rollover to the child/grandchild's RRSP.

**A child or grandchild is assumed to not be financially dependent if the child/grandchild earned more than the basic personal amount in the calendar year prior to the death. For the 1996 taxation year, the basic personal amount is $6,456 (this amount is the basic personal amount on which the non-refundable tax credit is based, at line 300 of the T1 General Tax Return, and may change from year to year, because it is indexed and is affected by the rate of inflation).

27. If I designate my estate as my RRSP beneficiary, then die, with no surviving spouse, but with a financially dependent, infirmed child/grandchild, may the executor elect to have the Refund of Premiums rollover (to RRSP) apply?

Yes. See Question 22 for more on electing Refund of Premiums rollover treatment.

28. Are the rules mentioned in the previous questions the same for Group RRSP members?

Yes.

29. What if I die holding a locked-in RRSP? a LIRA? Do the same rules apply with respect to these assets - as has just been described for a regular RRSP?

The options available on death vary between the provinces (although the income tax treatment is the same as for a regular RRSP).

In New Brunswick, Newfoundland, Nova Scotia, Ontario and Quebec, on the death of the owner of a LIRA or locked-in RRSP, the balance of the account goes to the deceased's spouse (the spouse is automatically designated as the beneficiary under the relevant provincial pension legislation). The proceeds are eligible for refund of premiums of treatment. If there is no surviving spouse the proceeds may be payable to a designated beneficiary or to the deceased's estate and the proceeds will be subject to taxation in the deceased's final return (unless a dependent or infirm child is receiving the proceeds in which case a rollover is available as with a regular RRSP).

In Alberta, British Columbia, Manitoba, Saskatchewan and for federally regulated plans, the balance of the LIRA or locked-in RRSP is paid to the deceased's spouse as a LIRA/locked-in RRSP, LIF, LRIF (in Alberta or Saskatchewan) or as a life pension. If there is no surviving spouse, the LIRA or locked-in RRSP proceeds are paid to the designated beneficiary or estate, and the proceeds will be subject to taxation on the deceased's final return (unless aa financially dependent child/grandchild is receiving the proceeds, in which case a rollover is available as with a regular RRSP).

30. What are my surviving spouse's options on my death if he or she has been designated as "successor annuitant" or "beneficiary" to my Investors RRIF?

If designated as successor annuitant, either under the plan or by will, your surviving spouse's options are:

  1. Continue to receive payments under the RRIF. The surviving spouse will be taxed on the payments as received.
  2. Commute the RRIF and transfer the commutation amount in excess of the minimum required payment to the spouse's RRSP, RRIF or special retirement program if over age 71. This is accomplished via an election under paragraph 60(l) of the Income Tax Act, using a T2030 form. (Note that the Tax Payment Certificate ("TPC") excess RRIF amount should be reported on line 232 of the tax return. Also, Revenue Canada form T2097 must be completed and attached to the TPC to claim the offsetting deduction. To save hassles, tax return preparers should indicate in line 232, or on a separate note, what the offsetting deduction is for, to avoid the incorrect application of Alternative Minimum Tax by Revenue Canada, as described in more detail in Sales Information Bulletin #4515 dated September 9, 1992).
  3. Cash the RRIF and pay tax on the amount received.

If designated as "beneficiary", but not successor annuitant, the RRIF does not continue in existence, so that payments do not continue to the surviving spouse. The surviving spouse can transfer the proceeds in excess of the minimum payments from the RRIF on a rollover basis to the surviving spouse's RRSP, RRIF or special retirement program if over 71. Alternatively, the surviving spouse can receive the cash amount directly and pay tax on same in the year of receipt.

The designation of surviving spouse as successor annuitant gives the surviving spouse more flexibility because annuity payments can continue if the surviving spouse so desires. However, note that it is now possible, with recent amendments to the Income Tax Act, for the deceased's legal representative and the surviving spouse to elect for the surviving spouse to be treated as "successor annuitant" and continue to receive payments under the RRIF, even if the surviving spouse was not designated as successor annuitant either under the plan or in the deceased's will, but the election will not be effective unless the RRIF carrier agrees to continue the payments under the RRIF to the surviving spouse. As a result, IF the RRIF carrier is agreeable to treating the surviving spouse as successor annuitant, it will not matter if the surviving spouse was not directly designated as successor annuitant.

If the RRIF is a Term Certain Annuity:

Where the spouse is designated as successor annuitant under the registered term certain annuity, the annuity payments simply continue to the surviving spouse. If the estate is the designated beneficiary and the surviving spouse is the sole or identifiable beneficiary under the will of the deceased, the deceased's legal representative and the surviving spouse can elect to have the payments under the annuity continued to the spouse and taxed in his or her hands as received, assuming that the RRIF carrier is agreeable to treating the surviving spouse as a successor annuitant. If the annuity payments represent the continuation of a commutable annuity, the surviving spouse could elect to commute and transfer the commutation amount directly to a new RRSP or to a special retirement income program if the spouse is over age 71.

31. Do payments under a RRIF to a surviving spouse qualify as "refund of premiums"?

No. A "Refund of Premiums" is an amount that is paid out of an unmatured RRSP to the spouse. Amounts paid out of a RRIF to a spouse that would have qualified as a refund of premiums had the amount been paid out of an RRSP are known as "designated benefits". The portion of the "designated benefit" which is in excess of the minimum amount that was required to be paid out of the RRIF for the year is eligible for transfer under paragraph 60(l), as discussed in the answer to Question 30.