Courtesy of Janet Baccarani & Jennifer Black from DFS Private Wealth.
Widows and widowers can face a variety of distinct issues come tax time. In our second installment on “Death and Taxes”, we examine RRSP options.
RRSP options after the death of a spouse
Let’s first deal with what some might consider the obvious. No contributions can be made to a deceased individual’s RRSP after the date of death.
Note however, the deceased individual’s legal representative can make contributions to the surviving spouse’s RRSP or common-law partner’s RRSP in the year of death or during the first 60 days after the end of that year. Contributions made to a spouse’s RRSP or common-law partner’s RRSP can be claimed on the deceased individual’s return, up to that individual’s RRSP deduction limit for the year of death.
Special Tax Rules Apply
Special tax rules apply to RRSPs when filing the final tax return for your spouse after death. These rules can also provide tax-planning opportunities. To illustrate this, let’s review some tax planning ideas involving a fictional couple. “David” is the executor and sole beneficiary of the estate of his wife, “Linda”, who died in April 2011.
Decrease taxable income of the deceased through spousal RRSP contribution
If Linda had unused RRSP contribution room and David is under age 72, David can still make one final RRSP contribution on behalf of Linda, but it must be to a spousal RRSP in his own name. A tax deduction on Linda’s tax return could be useful if Linda had lots of income to report for either 2010 or 2011. Cash to make such a contribution might come from life insurance.
The deadline for the spousal contribution on behalf of a deceased spouse is February 29, 2012 for the 2011 tax year.
Increase taxable income of deceased by avoiding a total RRSP rollover
Typically, an executor tries to wind up an estate promptly. However, the most straightforward RRSP transfer can cost more income tax than necessary.
Linda had designated David as her RRSP beneficiary to reduce probate costs. Instead of a tax-free rollover of the entire RRSP, David wonders if he could use the RRSP to somehow create more taxable income on his late wife’s tax return.
Since Linda died in April 2011, she would have her full year’s basic and personal credits available to claim on her final T1 tax return. In that case, David may not want to roll all of Linda’s RRSP over to himself tax-free. He may wish to renounce his right to inherit her RRSP by beneficiary designation and choose instead to inherit the RRSP under the terms of Linda’s will.
By letting Linda’s RRSP fall into her estate, David can then specify on a special tax form exactly how much of Linda’s RRSP value he wants for a tax-free transfer. That leaves the rest of the RRSP as income that can become taxable in 2011 at Linda’s low-bracket rate.
Feb. 29, 2012 is the RRSP deadline for 2011 contributions
April 30, 2012 is the normal tax filing deadline for the deceased spouse
If the deceased spouse died in November or December 2011, the tax filing deadline for them is six months after the date of death.
A surviving spouse should discuss these and other tax-planning scenarios involving estate property well before the RRSP deadline and the tax filing deadline. There’s more RRSP and tax information coming your way here at Widowed.ca, so please check back again soon. We’re here to help you take control of the future and move to the next Chapter of your life. Should you have questions you’d like to see addressed in a future blog, please e-mail me at: email@example.com.
For more information on related topics, please contact DFS Private Wealth, the author of Managing Alone and founder of widowed.ca. We are here to help and answer any questions you have. Should you need a connection to a professional in your area we would be happy to make the introduction for you to someone you can trust. Contact Us today.