Table of Contents
- What are Registered Accounts?
- How are Registered Accounts Important in Estate Planning?
- Various Kinds of Registered Accounts and How to Save Estate Taxes on Them
- First Home Savings Account (FHSA)
- Tax-Free Savings Account (TFSA)
- Registered Retirement Savings Accounts (RRSP)
- Registered Retirement Income Funds (RRIF)
- Registered Education Savings Plans (RESP)
- Registered Disability Savings Plan (RDSP)
- Voluntary Retirement Savings Plan (VRSP)
- Getting the Estate Tax Benefits
- The locked-in retirement account (LIRA)
- Pooled Registration Pension Plan (PRPP)
- Deferred Profit-Sharing Plan (DPSP)
- Target Benefit Plan
- Money Purchase Registered Pension Plan (MP RPP)
- Bottomline
Registered accounts provide Tax exemption or deferral. Are you worried that Death Taxes will cost a large chunk of your estate? Do you want your heirs to inherit the maximum they can? If yes, Registered Accounts are for you.
Registered accounts can be of great value, given that taxes are intensive in Canada. Nonetheless, all the assets owned by a deceased person are considered to be sold at his death, and hence, taxes become applicable.
One unique advantage of registered accounts is that their funds can be transferred to beneficiaries outside the estate. This key feature can provide a sense of empowerment and control in estate planning.
In this way, they can save a lot of taxes, and the heirs can inherit more.
What are Registered Accounts?
Registered accounts are investment accounts that get tax-deferred or tax-sheltered status from the Government.
How are Registered Accounts Important in Estate Planning?
They are one of the few assets belonging to a deceased person not subject to “Deemed Disposition.” Deemed Disposition is a concept the Canadian Revenue Agency utilizes to calculate Death Taxes. In this concept, the CRA considers all the assets belonging to a deceased person to be sold immediately before a person’s death at a fair market price.
In the case of registered accounts that are already tax-deferred or tax-exempt, there is an option to nominate a beneficiary who would inherit the account upon the owner’s death. In this way, they roll over directly to the designated beneficiary and avoid probate and death taxes.
Various Kinds of Registered Accounts and How to Save Estate Taxes on Them
There are many categories of registered accounts with varying tax implications.
- 1. First Home Savings Account (FHSA)
It is a registered account that can help a person save tax-free for his first real estate purchase.
In estate management, this account can play an important role.
- Save maximum taxes on FHSA on death
Following is the order of priority of accounts that are safest in the case of FHSA
- Nominate a survivor in the account.
- Nominate a beneficiary in the account.
- Designate a beneficiary in your will.
- If none of the above exists, the assets roll over to the estate.
Note that no one can transfer any amount to the FHSA after the holder’s death.
In most cases, the heirs can transfer the money in FHSA to another registered account or inherit it tax-free or tax-deferral.
- In case of excess amount present in the account
If an excess amount is present in the account, above the maximum limit for a particular account, it incurs a 1% tax.
- 2. Tax-Free Savings Account (TFSA)
This account allows Canadians to save money for future use tax-free.
- What happens to TFSA funds after the account holder dies?
All provinces except Quebec have a provision whereby a TFSA account holder can nominate a survivor. In this case, the funds move to the nominee without probate or tax.
- Tax Benefits
- All that is present in the TFSA at the time of death is withdrawable tax-free.
- All the funds go to the deceased's estate tax-free.
- The beneficiaries can inherit the funds tax-free.
- TFSA is a reliable tool for saving estate taxes and probate fees.
- 3. Registered Retirement Savings Accounts (RRSP)
RRSP is an investment account supervised by the Canadian Federal Government in which salaried or self-employed individuals keep money to utilize after retirement.
- Estate Tax Benefits
- Spousal Rollove Spousal rollover is available without taxes and probate. For this purpose, you must nominate your spouse as a beneficiary.
- Transfer to a child or a third person In this case, the amount in the account is considered an income and thus becomes subject to taxes.
- Dependent Children In this case, there is a provision for purchasing an annuity. It provides certain tax benefits. From that annuity, the children can receive income until they turn 18.
- It is Tax deferral, Not Tax-free The amount in such an account stays there tax-free. It is more of a tax-deferral account than a tax-free one because the money is taxable when subject to a withdrawal.
- 4. Registered Retirement Income Funds (RRIF)
It is another plan registered with the CRA. It operates on a tax-deferral basis.
Like RRSP, you can invest in this account opened with an insurance company or a bank and enjoy the funds after retirement.
- Estate Tax Benefits
Benefits depend on the following factors
- Whether you name a beneficiary or not If you do not name a beneficiary, the funds go to the estate and are liable for taxes, just as all other assets are.
So, DO name a beneficiary!
- Who do you name as your beneficiary? The rollover occurs without taxes if you name your spouse or a dependent child as a beneficiary.
- 5. Registered Education Savings Plans (RESP)
RESP is another tax deferral plan for college education. Its sponsor is the Canadian Government.
- Tax Benefits
It would help if you drafted a RESP with joint holding.
In this case, the account rolls over to the survivor without tax and probate.
The assets roll over to the estate if there is no surviving subscriber.
You should draft the contract so that it allows a subscriber to nominate a subsequent subscriber.
Having such a provision will save on the maximum estate tax.
- 6. Registered Disability Savings Plan (RDSP)
It is a financial account for a person with a disability that the Canadian Government can open to make investments and let his income grow tax-free.
- Estate tax benefits
The amounts in the account are taxable only partially, i.e., those that purport to be income.
The whole amount goes to the estate must be distributed by 31st December of the year of death.
On the holder’s death, the account ceases to exist.
- 7. Voluntary Retirement Savings Plan (VRSP)
It is an account that the employers open for their employees to help them reach their retirement saving goals.
- 8. Getting the Estate Tax Benefits
You should nominate your spouse, dependent children or common-law partner as a beneficiary.
In this way, the whole amount will roll over to him without probate.
- 9. The locked-in retirement account (LIRA)
- It is a savings account in which you can save your sum. Unlike RRS, LIRA doesn't allow the withdrawal of any sum before retirement.
- Estate Tax Benefit
This kind of account rolls over automatically to the surviving spouse or dependent children.
- 10. Pooled Registration Pension Plan (PRPP)
It is a voluntary, low-cost, portable pension plan. It is chargeable with taxes unless you name your spouse or dependent children as beneficiaries.
- 11. Deferred Profit-Sharing Plan (DPSP)
It is a plan in which the employers share a part of their profit with the employees.
To save estate taxes, you should nominate your spouse or common-law partner as the survivor.
In that case, the survivor, after your death, can transfer the funds to their own RRSP.
- 12. Target Benefit Plan
It is a fixed contribution plan. In this plan, subscribers make pre-defined deposits, irrespective of the targeted amount.
Like most plans, if a contributor dies before retirement, his spouse can receive the whole sum without probate.
- 13. Money Purchase Registered Pension Plan (MP RPP)
It is a pension plan in which the amount of contribution is not fixed, and the employees can contribute to it as they choose.
On the plan holder’s death, a lump sum survivor’s benefit automatically becomes payable to the spouse.
Bottomline
Estate planning can be challenging and intricate. But these intricacies leave you with many options to choose from and reduce your taxes to the minimum. In this regard, registered accounts are a handy tool which one can rely on for efficient estate tax management.