In general, most people name their spouse as the beneficiary on their Registered Retirement Savings Plan (“RRSP”). Upon death, the RRSP will transfer to the spouse’s RRSP fund and tax is deferred.
What if you also have other assets such as non-registered investments where they have dropped in value and have an unrealized capital loss. If willed to the spouse, the investments would transfer at cost leaving a potential capital loss in the future that can only be applied against capital gains. This is a non-issue if the spouse has many assets with potential capital gains, however if they do not, the capital loss may be difficult to utilize.
Although capital losses can be applied against other income in the final death return (with some restrictions) what if there is not much income to report. In some situations, it may be more advantageous to name the estate as the beneficiary rather than the spouse.
If the estate is named the beneficiary, the assets will be disposed of at fair market value and recorded on the death return. This means the entire RRSP would be treated as taxable income and the capital loss on the investments would be recognized on the death return. The taxable income could then be offset by the capital loss; however, only in a perfect world would they be completely offset.
The executor of the estate could however, jointly elect with the spouse to transfer a portion of the RRSP to the spouse’s RRSP fund tax free and leave whatever amount was needed to completely utilize the capital loss in the death return.
It is important for individuals to review their wills regularly for potential opportunities to save tax and hassle for your loved ones in the future.