Tax Tip Thursday

What happens to a spouse’s investments after they pass?

I want to talk about what happens to a spouse’s investments – registered and unregistered when they die.

It is very important that you have your accounts set up correctly PRIOR to a death.  After that, there is little that can be done to change it.

 

Key Principles

  1. No Inheritance Tax in Canada
    Canada does not levy a tax on the recipient of an inheritance. However, the deceased’s estate may owe taxes before assets are transferred. This is because of the deemed disposition rule: CRA treats all assets as sold at fair market value immediately before death, triggering capital gains tax on the final return.
  2. Spousal Rollover – Tax-Free Transfer
    If assets (registered or non-registered) are transferred to a surviving spouse or common-law partner who is a Canadian resident, the transfer CAN occur on a tax-deferred basis. This means:

    • No capital gains tax at the time of transfer.
    • The spouse inherits the original cost base and pays tax only when they sell the asset later.

RRSPs

General Rule – Deemed Disposition

  • When an RRSP holder dies, the full fair market value (FMV) of the RRSP is included in the deceased’s final income tax return as income.
  • This can create a significant tax liability for the estate.

Tax-Deferred Transfers (Spousal Rollover)

  • If the spouse or common-law partner is named as beneficiary, the RRSP can transfer tax-free to:
    • The spouse’s RRSP, RRIF, or
    • An eligible annuity.
  • Taxes are deferred until the spouse withdraws funds later.
  • Conditions:
    • Transfer must occur by December 31 of the year following death.
    • Spouse must be 71 or younger at the end of the year the transfer is made.

Other Qualified Beneficiaries

  • Financially dependent child or grandchild:
    • If under 18: can transfer to an annuity payable until age 18.
    • If infirm (any age): can transfer to RRSP, RRIF, or Registered Disability Savings Plan (RDSP).
  • These transfers are also tax-deferred.

Non-Qualified Beneficiaries

  • If the RRSP is left to:
    • Estate, or
    • Adult child who is not dependent, or
    • Any other person,
  • The RRSP value is taxed on the deceased’s final return, and the estate pays the tax before distribution.

Income After Death

  • RRSP remains tax-sheltered until December 31 of the year after death.
  • Any growth after death is taxable to the beneficiary or estate when paid out.

CRA Forms & Reporting

  • T4RSP Slip: Issued for RRSP amounts deemed received at death.
  • Beneficiary receiving a direct transfer should also have a T2019 form completed and signed by the financial institution where the RRSP is held:
    • Reports amount on line 12900 of their return.
    • Claims offsetting deduction on line 20800 (RRSP) or line 23200 (RRIF).
  • No tax withheld at source on direct transfers to qualified beneficiaries.

Planning Tips

  • Name your spouse as beneficiary to avoid immediate taxation and probate.
  • Complete transfers by Dec 31 of the year following death.
  • Consider electing out of rollover in rare cases (e.g., to use capital losses or exemptions).

 

TFSA

No Tax on TFSA Value at Death

  • The fair market value (FMV) of the TFSA at the date of death is not taxable to the deceased or the estate.
  • However, income earned after death (and any increase in value after death) is taxable unless the spouse is named as a successor holder.

Successor Holder (Best Option)

  • Only a spouse or common-law partner can be named as a successor holder.
  • If named:
    • They automatically become the new TFSA holder upon death.
    • The account continues tax-free, including income earned after death.
    • Does not affect their own TFSA contribution room.
    • No CRA form required; the TFSA simply transfers ownership.

 

Designated Beneficiary (Alternative Option)

  • If the spouse is named as a beneficiary (not successor holder):
    • The TFSA ceases to exist as a TFSA at death.
    • The spouse receives the funds and can make an exempt contribution to their own TFSA:
      • Up to the FMV at date of death.
      • Does not affect their own TFSA room.
    • Any growth after death is taxable income to the spouse.
  • Conditions for exempt contribution:
    • Must be made by Dec 31 of the year following death.
    • Must file CRA Form RC240 within 30 days of contribution.

Non-Registered Investments

  • These can transfer tax-deferred under spousal rollover rules (ITA 70(6)). No immediate tax if:
    • Spouse is Canadian resident.
    • Transfer occurs within 36 months of death.
  • Executor reports the transfer on the deceased’s final return (Schedule 3) but defers the gain.

Forms & Process

  1. Final Return (T1) for the deceased, including deemed disposition unless rollover applies.
  2. Optional Returns (Rights or Things, Business, etc.) if applicable.
  3. T3 Trust Return if assets go through an estate or spousal trust.
  4. CRA Forms:
    • T2019 – RRSP/RRIF rollover
    • RC240 – TFSA exempt contribution
  5. Provide Death Certificate, Will, and Beneficiary Designations to financial institutions.

Other Considerations

  • Probate Fees: In Ontario, 1.5% on estate value over $50,000.
  • Timing: Transfers must be completed within 36 months for rollover eligibility.
  • Planning Tip: Naming spouse as beneficiary or successor holder avoids probate and simplifies tax-free transfer.

It is important to have a succession plan for your  investments. Your accountant can help you make that plan! Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.