Income Tax Consequences of Registered Accounts Upon and After Death

RRSP/RRIF, FHSA, TFSA, Locked-In Accounts, RESP, Registered Annuities

Estimated reading time: 12 to 15 minutes

Death brings not only emotional challenges but also important tax and estate planning considerations. When planning your finances, registered accounts are often viewed as efficient, long-term tools for saving and investing. While Canadians are more often aware that non-registered assets are generally subject to a deemed disposition and capital gains tax at death, many Canadians are, however, surprised to learn that registered accounts can trigger significant tax consequences upon and after death if they are not structured properly.

Registered accounts have unique tax treatments, including their own rules, rollover options, and risks, depending on the account type and beneficiary designations. Understanding these distinctions is essential for effective estate planning and for ensuring that as much of your wealth as possible is preserved for your beneficiaries.

Below is an overview of how Canada’s most common registered accounts are treated at and after death, and where planning mistakes often occur.

RRSP & RRIF — Taxable on Death Unless Transferred to an Eligible Beneficiary

The Registered Retirement Savings Plan (RRSP) and its retirement-stage counterpart, the Registered Retirement Income Fund (RRIF), are core retirement planning tools for Canadians that allow income to be contributed and grow on a tax-deferred basis. They are not tax-free accounts, rather tax deferred, as they will be subject to income tax at some point. Canadians most often convert RRSPs to RRIF’s at retirement to provide flexibility with ongoing withdrawals. As income tax has been deferred for many years during the contribution period, these accounts are among the most significant tax considerations at death.

What Happens at Death

At death, the full fair market value of a RRSP or RRIF is generally treated as a deemed withdrawal immediately before death. In other words, the Canada Revenue Agency (CRA) treats the entire balance of the RRSP or RRIF as having been withdrawn and, as such, is taxed accordingly. As a result, this amount is included as income on the deceased’s final/terminal tax return.

If no planning is in place, this can result in:

• A large income inclusion in the final tax year
• Income taxed at higher, or the highest, marginal rates
• A significant reduction in what beneficiaries ultimately receive

When Tax Can Be Deferred

Luckily for Canadians, tax may be deferred in certain situations if the account is transferred to an eligible beneficiary, most commonly:

• A spouse or common-law partner under the Spousal Rollover exemption, which is automatically applied unless elected to opt-out
• A financially dependent child or grandchild

In these cases, the RRSP or RRIF can often be rolled into the beneficiary’s own registered plan or used to purchase an eligible annuity, deferring tax until funds are withdrawn later.

If the beneficiary is not eligible, the account value is fully taxable at death, even if paid to the estate or directly to a named beneficiary.

Tax Implications at Death When Non-Eligible Beneficiaries Are Designated

When non-eligible beneficiaries are designated under a RRSP or RRIF, the account proceeds typically pass outside of the estate, allowing them to bypass probate and be paid directly to the beneficiary. While this can reduce probate fees and speed up distribution, it does not eliminate the tax consequences associated with these accounts.

The full value of the RRSP or RRIF is still included as income on the deceased’s final tax return, and the resulting tax liability is generally the responsibility of the estate. This can create challenges when other assets flow through the estate and are reduced by their own taxes, debts, or expenses, leaving an insufficient after-tax asset base to cover the RRSP/RRIF tax owing.

In situations where the estate cannot satisfy the total tax liability, including the corresponding amount related to the RRSP or RRIF, the CRA may pursue recovery directly from the RRSP or RRIF beneficiaries who received the proceeds. As a result, while naming beneficiaries can simplify probate and speed up distribution, it can also introduce unintended tax and liquidity risks if the overall estate structure is not carefully coordinated.

FHSA — Newer Account, Familiar Tax Rules at Death

The First Home Savings Account (FHSA) is a newer registered plan designed to help Canadians save for a first home by combining features of both an RRSP and a TFSA. Contributions are tax-deductible, and qualifying withdrawals for a first home are tax-free, making the FHSA truly the love child of the RRSP and TFSA. However, like other registered accounts, the FHSA has distinct tax consequences upon and after death that depend on beneficiary designations and whether the account can be transferred to an eligible survivor.

What Happens at Death

At death, the fair market value of the FHSA is generally included in the deceased’s income on their final tax return, similar to an RRSP, unless the account is transferred to an eligible beneficiary. Without proper planning, this can result in a large income inclusion in the year of death and significantly reduce the amount passed on to beneficiaries.

When Tax Can Be Deferred

Tax may be deferred when the FHSA is transferred to a qualifying survivor, most commonly a spouse or common-law partner who is designated as either the beneficiary or successor holder. Under Canada Revenue Agency (CRA) rules, a qualifying survivor is a spouse or common-law partner who receives the FHSA proceeds and meets the conditions to complete an exempt transfer.

When properly structured, the deceased’s FHSA can be transferred on a tax-deferred basis to the surviving spouse in one of two ways:

• To the spouse’s own FHSA, if the spouse is a qualifying individual (generally meaning they are a first-time home buyer and otherwise eligible to hold an FHSA), or
• To the spouse’s RRSP or RRIF, if the spouse is not eligible to open or maintain an FHSA.

The difference between naming a successor holder and a beneficiary is mostly administrative and procedural rather than as dramatic as it is with a TFSA. That said, the distinction still matters.

A successor holder (available only to a spouse or common-law partner) allows the FHSA to continue in the survivor’s name without collapsing the account, provided the spouse is a qualifying individual. This is the most seamless outcome and simplifies administration, since the account itself continues rather than being paid out and re-contributed.

A beneficiary designation means the FHSA is paid out to the spouse or estate first and then must be transferred as an exempt transfer into the spouse’s FHSA, RRSP, or RRIF to preserve tax deferral. The tax result can still be the same if done correctly, but it requires more steps, stricter timelines, and proper CRA reporting.

So unlike a TFSA, where successor holder vs beneficiary creates very different tax outcomes, with an FHSA the tax result can be similar, but the risk of error is higher when using a beneficiary designation because failure to meet eligibility rules or filing requirements will cause the FHSA to become taxable. The successor holder designation mainly reduces administrative friction and the chance of losing tax deferral through a technical mistake.

In all cases, the transfer must be completed within prescribed timelines (generally by the end of the year following the year of death) and properly designated as an exempt transfer with the form RC722 Transfer from an FHSA to an FHSA, RRSP or RRIF After the Death of the Holder that must be filed with the CRA. When these conditions are met, the value of the FHSA is not included in the deceased’s final income tax return and no immediate tax is triggered for the surviving spouse. Instead, the funds retain their tax-deferred status and are only taxed later when withdrawn from the spouse’s FHSA (in certain situations, such as upon death or if not a qualifying withdrawal), RRSP, or RRIF.

An FHSA cannot be directly transferred to a TFSA, even for a surviving spouse. Unlike a TFSA, the FHSA is a tax-deferred account with contribution limits and rollover rules that are tied to registered plans like an FHSA, RRSP, or RRIF. Any attempt to transfer FHSA funds into a TFSA would not preserve the tax-deferred status and would count as a new TFSA contribution, potentially exceeding contribution limits. To maintain tax deferral, the FHSA must be rolled over to the spouse’s own FHSA (if they are a qualifying individual) or into their RRSP or RRIF using Form RC722.

Tax Implications at Death When Non-Eligible Beneficiaries Are Designated

If the FHSA is left to a non-eligible beneficiary (such as an adult child or other family member), the account is considered disposed of at death. The full value is included as income on the deceased’s final tax return, even if the proceeds are paid directly to the beneficiary outside the estate.

As with RRSPs and RRIFs, this can create estate liquidity issues where the estate must pay the tax, but the funds bypass the estate and go directly to the beneficiary.

After Death — Spousal Rollovers, Growth, and Tax Consequences

Any investment growth in an FHSA after the account holder’s death may be subject to tax, but the outcome depends on how the account is administered and who ultimately receives the funds. If the surviving spouse is designated as a successor holder or as a beneficiary and meets the CRA’s definition of a qualifying individual, the FHSA can be transferred to their own FHSA or, if they are not eligible, into their RRSP or RRIF using the exempt spousal rollover rules (using Form RC722). When this rollover is completed correctly, the account retains its tax-deferred status, and no immediate tax is triggered.

However, if the spouse is not designated as a successor holder or direct beneficiary, the FHSA cannot automatically qualify for the spousal rollover. In this case, the FHSA is considered part of the deceased’s estate, and the account may be collapsed, with the fair market value included in the deceased’s final income tax return. Any growth earned after death may also be taxable if the funds are later paid out to a non-eligible beneficiary or the estate. In other words, failure to designate the spouse correctly can prevent the use of spousal rollover rules, resulting in immediate taxation on the account’s value and post-death growth, rather than deferring it to the surviving spouse.

This highlights why proper beneficiary designation or successor holder election is critical. Without it, the account loses its ability to take advantage of the tax-deferred rollover, and both the deceased’s estate and the beneficiaries may face unexpected taxes.

TFSA — Tax-Free for the Deceased, Potential Tax on Post-Death Growth

Tax-Free Savings Accounts (TFSA’s) are unique among registered accounts because no tax is triggered at death on the value accumulated leading up to the date of death. However, despite being tax-free up to, and including, the date of death, there are more nuances after death that should also be considered.

What Happens at Death

One of the greatest benefits of the TFSA is the ability to leverage after-tax income to contribute to the account(s) and generate entirely tax-free returns while living. This is not only true leading up to death but also at the time of death. What this means is that, unlike a RRSP or RRIF, the value of the TFSA at death is not included in the deceased’s income on the final tax return, thereby preserving the entirety of the contributions and tax-free growth earned during one’s lifetime.

Post-Death Growth

After death, however, this is where the nuances come into play. Unfortunately, the account(s) no longer operate as a TFSA. Any investment growth earned after the date of death may become taxable to the beneficiary or estate. The key word here is may. In certain situations, as indicated below, tax can continue to be avoided on the value of the TFSA.

Successor Holder vs. Beneficiary:

Many Canadians are unaware that there is an important distinction between naming a successor holder and naming a beneficiary on a TFSA, and that choosing the wrong designation can have significant, unintended tax implications.

A successor holder designation is available only to a spouse or common-law partner and allows the surviving spouse to step directly into ownership of the TFSA upon death. In this case, the account does not collapse or trigger a distribution. Instead, it continues in the survivor’s name as their own TFSA. As the transfer occurs by succession, rather than contribution, the value of the TFSA does not use or reduce the surviving spouse’s existing TFSA contribution room, and the account retains its full tax-free status on both existing funds and future growth.

In comparison, when a spouse is named only as a beneficiary, the TFSA ceases to exist at death. While the value accumulated up to the date of death remains tax-free, any future growth, such as interest, dividends, or capital gains, will become taxable while as part of the estate until distributed to the designated beneficiaries. Since the transfer is not by succession, as is the case with the successor holder designation, the funds are subject to the available contribution limit of the surviving spouse if contributed to their TFSA or a RRSP (a RRIF would not be eligible for contributions). Much care should be taken to not exceed the available contribution room of the surviving spouse as this will trigger penalties if exceeded. For these reasons, careful planning and proper beneficiary designation are therefore essential to preserve tax-free status and avoid unintended post-death taxation and/or penalties, as applicable.

Locked-In Accounts (LIRA, LRSP, LIF) — Unlocking and Taxation

Locked-in accounts are registered plans that originate from employer pension programs and are designed to ensure that Canadians preserve retirement savings for their intended purpose: funding retirement. These accounts are governed by federal and provincial pension legislation, which imposes restrictions on withdrawals to prevent premature access. A Locked-In Retirement Account (LIRA) or Locked-in Retirement Savings Plan (LRSP) allows individuals who leave a pension plan to transfer their pension funds as a commuted value, the lump-sum present value of the future pension payments they would have received, while keeping the funds “locked in” until retirement. At retirement, these funds are typically converted into a Life Income Fund (LIF) or similar vehicle, which provides a steady stream of retirement income, similar to a RRIF, but still imposes annual minimum and maximum withdrawal limits. Understanding these restrictions is crucial, as they affect both investment flexibility during retirement and the tax consequences upon death.

What Happens at Death

Upon death, the “locked-in” restriction generally goes away. When this occurs, typically the funds may:

• Transfer to a surviving spouse under the Spousal Rollover exemption, which is automatically applied unless elected to opt-out
• Be paid out to another beneficiary or the estate

Tax Treatment

Amounts paid out of a LIRA, LRSP, or LIF are fully taxable as income, unless transferred into another eligible registered plan where permitted. The tax does not arise because of death itself, but because funds are ultimately withdrawn from the registered account(s).

RESP — Pension-Like Tax Treatment and Estate Inclusion

Registered Education Savings Plans (RESP’s) are registered accounts designed to help Canadians save for a child’s post-secondary education, offering tax-deferred investment growth and access to government funds, such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB). While RESP’s are commonly viewed as education-only savings accounts, they are often overlooked in estate planning because their ownership, control, and tax treatment differ materially from other registered accounts. The decisions made at death can directly affect how the plan is administered, taxed, or continued, making RESP’s an important, but frequently underestimated, component of a comprehensive estate plan.

Ownership Matters

A RESP is owned by the subscriber, who is the individual that establishes and controls the plan, makes contributions, and determines how and when funds are withdrawn. The beneficiary (typically a child or grandchild) does not own the account and has no legal control over it. As a result, the RESP generally forms part of the subscriber’s estate at death, unless special arrangements, such as naming a successor subscriber or coordinating the plan with the terms of a will, are in place. A successor subscriber is typically the spouse or common-law partner of the original RESP subscriber, and only one adult successor can be named. When a successor subscriber is properly designated, control of the RESP transfers seamlessly to that individual, allowing the plan to continue without being collapsed, triggering grant repayment, or accelerating taxation. This distinction is critical in estate planning, as it determines who can assume control of the plan, maintain its tax-deferred status, and ensure the account continues to serve its intended purpose of funding a beneficiary’s education.

What Happens at Death

When a subscriber dies, a RESP does not automatically trigger tax. Its tax treatment is not determined by the mere existence of an eligible beneficiary, but by whether the plan can legally continue under a new subscriber. As the RESP is owned and controlled by the subscriber, not the beneficiary, a lack of successor subscriber designation or proper coordination within a will can force the plan to collapse, even where an eligible beneficiary exists, resulting in avoidable taxation and government grant clawbacks.

• Contributions made to a RESP can generally be returned to the subscriber or estate on a tax-free basis, as they were made with after-tax dollars.
• Government grants and bonds (such as the CESG and CLB) may be required to be repaid to the government if the RESP is collapsed and there is no eligible beneficiary to continue the plan.
• Investment earnings may be taxed when withdrawn as Accumulated Income Payments (AIP’s) if the RESP cannot be used for educational purposes, with these amounts included as income of the subscriber’s estate (or the successor subscriber if one is named) and may be subject to additional tax, unless they are transferred to an RRSP or another permitted plan where allowed.

Proper estate planning and the designation of a successor subscriber are therefore essential to ensure the RESP continues uninterrupted, preserves tax benefits, and fulfills its purpose of funding the beneficiary’s education.

Registered Annuities — Taxable as Income

Registered annuities are financial products purchased using funds from registered plans such as RRSPs, RRIFs, or pension proceeds, designed to provide a steady, predictable stream of retirement income. Unlike other registered accounts, annuities convert accumulated savings into a contractual income flow, often for life or a fixed term, which can continue after the annuitant’s death depending on the contract. Since the funds are drawn from registered sources, the tax treatment of payments is governed both by the annuity contract and the rules of the underlying registered plan. Understanding these rules are important in estate planning, as annuities can impact income taxation for surviving beneficiaries and influence the liquidity and distribution of the estate.

What Happens at Death

When the annuitant, the person whose life or age determines the timing and amount of payments from an annuity, of a registered annuity dies, the annuity itself does not trigger an immediate tax liability. Unlike RRSPs or RRIFs, there is no deemed withdrawal of the full account value at death. The tax consequences depend on the terms of the annuity contract and whether payments continue to a named beneficiary.

After Death — Payments and Tax Treatment

If the annuity continues to pay a surviving beneficiary, ongoing payments are fully taxable as income to the beneficiary. In a life-only annuity, any remaining value stays with the insurance company and is not paid out, so no tax arises. In contracts with a residual, term-certain, or cash-back payout, any remaining value may be paid either to the estate or directly to a named beneficiary. The full amount of these lump-sum payments are included as income in the year received, with the estate paying tax on amount(s) it receives and the beneficiary paying tax on amount(s) paid directly to them. It should be noted that the residual value is not included on the deceased’s final personal return. Cash-back amounts, which guarantee a minimum payout to protect the annuitant’s principal, are also taxed as income because they originate from tax-deferred registered funds; all payments from a registered annuity are treated as income when received, regardless of who receives the funds.

Registered annuities do not receive preferential tax treatment or capital gains treatment. Proper planning, beneficiary designation(s), and coordination with a will, as applicable, are important to ensure that payments to beneficiaries are managed efficiently and tax consequences are minimized.

Why This Matters

Registered accounts often represent a significant portion of a household’s net worth, but their tax efficiency during life does not automatically carry over at and after death.

Without proper planning:

• Large tax bills can arise on the deceased’s final return, or for the estate/beneficiaries for accounts like RRSP’s, RRIF’s, RESP’s, registered annuities, and FHSA’s.
• Post-death growth in TFSA’s may become taxable if a successor holder is not designated. FHSA growth after death may also be taxable if the surviving spouse is not designated as a successor holder or eligible beneficiary, or if the transfer is not completed as an exempt rollover.
• Government grants in RESP’s may need to be repaid, and AIP’s may be taxed if the plan cannot continue for the intended beneficiary.
• Estate liquidity issues can occur, particularly when RRSP, RRIF, or FHSA beneficiaries are named outside the estate (as direct beneficiaries rather than residual beneficiaries of the estate). While these proceeds bypass probate, the associated tax liability is still generally payable by the estate. If other assets in the estate are insufficient to cover the tax, the CRA may seek to recover funds from the direct beneficiaries to recoup the tax owing, resulting in the intended inheritances to be materially reduced.

Summary

Registered accounts can provide significant financial advantages during life, but their tax efficiency does not automatically transfer at death. Each account type has unique rules and post-death considerations that can materially impact beneficiaries and estates.

Careful beneficiary designations, spousal rollovers, successor planning, and coordination with wills are critical to managing these outcomes and preserving both tax efficiency and intended inheritances.