Why business owners need to look again at who is named on the form, and how a spousal rollover defers the tax
By Mina Alexander | Alexander Tax Law
If you own a business and hold an RRSP, your beneficiary designation may be quietly working against your estate plan. A single line on a form can shift both wealth and tax in ways you never intended.
Under subsection 146(8.8) of the Income Tax Act, the fair market value of your RRSP at death is generally included in your final return. The child you name as beneficiary receives the plan directly, but the tax it generates lands on your estate, funded from the shares, investments, or cash meant for everyone else. This can unfairly result in one heir receiving a clean asset while the rest quietly absorbs the bill. For a business owner whose wealth is often tied up in an operating company, that unexpected liability can force asset sales or strain a succession at the worst possible moment.
A tax deferred rollover can help. When your spouse or common law partner is named as beneficiary, the RRSP can generally be transferred into their own RRSP or RRIF without triggering tax on your final return. The plan is not cashed out and taxed at death. Instead, the tax is deferred until your spouse later withdraws the funds or passes away, allowing the savings to keep growing in the meantime. Certain financially dependent children or grandchildren may have similar options.
For example, suppose Abraham holds a $400,000 RRSP and names his wife Sarah as beneficiary. Rather than that full amount being added to Abraham’s income in the year of death and taxed immediately, it rolls into Sarah’s RRSP intact. No tax arises at that point. Sarah is taxed only as she draws on the funds through her retirement, spread over time and often at lower rates. Had Abraham instead named an adult child, that deferral would not be available, and the tax would fall due at death.
Check who is named on your plan
Beneficiary designations are usually made once and rarely revisited, often years before a business, a second marriage or a succession plan entered the picture. We review RRSP and RRIF designations alongside your will, shareholder agreement and corporate structure so the tax falls where you intend it to.
Alexander Tax Law
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