RRSP Beneficiary Designations

What is the validity of Beneficiary Designations in RRSP’s? Are they valid testamentary dispositions or must the beneficiaries to these plans be specified in the Will?

In Alberta, the Trustee Act allows for a participant in a “plan” to designate a beneficiary to that plan. It is specifically provided in the Act that RRSP’s are a “plan”.

If the plan was issued by an insurance company, the funds go directly to the beneficiary and are not part of the Estate assets. This is because the Insurance Act specifically exempts all products sold by insurance companies from being part of the Estate assets.

If the plan was issued by a financial institution other than an insurance company, then the funds form part of the Estate for tax purposes. As a result, the Estate is responsible for the taxes associated with the plan as it constitutes income of the Estate. Canada Revenue Agency takes the position that the person who receives the benefit is jointly liable with the Estate for the payment of the relevant tax (s. 160.2). However, despite the fact that the Estate is liable for the tax, the Estate has no claim over against the designated beneficiary for the taxes paid. Also, an issuer of a plan who pays the proceeds of the plan to a designated beneficiary is not required to withhold part of the proceeds to meet potential tax liability.

Since the general law of Estates is applicable, the Estate is responsible for paying the taxes on a plan. However, the testator can express a contrary intention to this general rule in a Will or other testamentary document. The testator can expressly state that the taxes payable on the plan be taken out of the proceeds of the plan and the beneficiary receive the net proceeds. However, if there is no express intention to this effect, the tax liability is paid from the residue first and if the residue is insufficient to cover the Estate debt, then the specific legacy, in the form of the plan proceeds, are charged with the payment of the balance.

If a person who has a plan designates a beneficiary in the plan document, a Will can revoke the designation and appoint another beneficiary to that plan. A problem may arise when the issuer who does not know of the new beneficiary designation pays out to the person named on the plan contract. It is therefore important to notify the issuer when a change or revocation of the plan beneficiary is made.