Wealth Update – Minors as RRSP Beneficiaries

This week we helped on an interesting case involving a single parent and beneficiary designations.

This parent has a nine-year-old and wants them to be the beneficiary for their RRSP. Can this be done and if so, how?

Well, there are provisions in the tax act that allow a minor child to be the beneficiary and receive an annuity to the age 18.

Here are the details:

Term annuity for a minor

This type of annuity is defined by CRA. On the death of a parent or grandparent, registered funds can be transferred to a minor child to purchase a term annuity. This provides a tax benefit to the Estate, as it does not have to declare the registered plan surrender as income to the deceased. The minor child receives the tax reporting for the annuity payments. Since typically a minor has a significantly lower income, the tax impact to the child over the term of the annuity is less than the tax impact would be to the Estate.

CRA conditions

1. the funds must be registered (RSP/LIRA/RIF/LIF or RPP funds)

2. the final payment must occur after the 18th birthday of the minor child

3. the length of term cannot exceed the 19th birthday of the minor child

4. the term of the policy must be in whole years (years/months are not allowed)

Annuity requirements

The minor child is the annuitant of the policy 

• proof of age is required to be submitted with the application

• SIN is required

 The parent/guardian/trust is the owner in trust for the child (ex. John Doe ITF Baby Doe)

• identification is required for this individual

 The minor child is the payee on the policy:

• payments can be made by cheque to the owner (in trust for the minor child) or by EFT to an account that is in the child’s name

The beneficiary must be the Estate of Minor Child  

Tax slips for the annuity payments are sent in the name of the child. Tax withholding on these payments is optional.

Transfer requirements

The funds must be registered. The transferring institution will specify the form requirements:

• if the funds are transferred directly from the deceased parent’s (grandparent’s) account, a T2033 or T2151 are the most common forms to receive

• if the funds have been released to the Estate and the Estate has written the purchase cheque, we require either:

• a letter from the original institution confirming that the funds were released as registered funds

• form T2019 is completed and included with the application

 Remember, the child must be a dependent of either the parent or grandparent (not both).

Thanks to Canada Life for this detailed description of the process.

As a follow up to last week’s email regarding Low Volatility Funds, we want to point out that Empire Life also has their Value Focused Legacy Funds that also have lower volatility and downside protection.