Dr. Garth

“Long time reader and enthusiastic proponent of sharing the wisdom you have preached for years,” writes Stephanie in her MSU. “I have always touted the benefit of RRSPs as a great vehicle to force the savings for the future, however, I somehow missed the tax implications upon one’s death.”

Bummer. Seems like mom is equally uninformed.

“My father passed away 20 years ago, so my mom naturally had his RRSPs transferred to hers without any tax implications. What I did not realize, is that upon my mother’s death there is no way to tax shelter any of her remaining RRSP funds and her estate will pay the full taxable amount on her remaining amount left.

“Is that really the case? Is there no way to tax-shelter a surviving spouse’s remaining RRSPs? (Not that I am a money hungry child looking for my inheritance soon, but this feels like a good motivator to ensure my mom actually spends those hard saved dollars in her retirement years so her estate doesn’t have to pay a one lump tax bill when the time comes.)”

As we all know, Steph, money contributed to a retirement plan grows tax free and can be deducted from taxable income. At age 71 it should be converted to a RRIF, invested in the same stuff, yielding more taxless gains. Only a trickle of income need be taken annually, added to income.

When you croak, the remaining funds – in an RRSP or a retirement fund – can be passed on to a beneficiary. So the registered assets are rolled over, not cashed and taxed.

Who can a bene be?

Mostly it’s spouses – the married or common-law kind. The assets can go to them directly (normally the case) or through a trust. Children or grandkids can also be beneficiaries, but only if they’re financially dependent on the dearly departed. The cut-off age is 18, unless the child has a mental or physical disability.

If no beneficiary is named, the registered assets go into the estate, deemed to be sold at the moment of death – and taxed in that year. (The terminal tax return must be filed by the executor within six months of The End.) It’s the same outcome when the RRSP or RRIF is left to a beneficiary other than a spouse or qualifying kid. As with Steph’s mom.

So when she passes, the unspent RRSP money will become taxable, included in income. If it’s a few hundred grand, the marginal tax rate could rise about 50%. Yes, Stephanie, it’s far better for mom to suck it out and spend it on having a good life – at a lower rate. After all, that was the point. Her husband got a tax break for contributing. She got a break on decades of untaxed accumulation within the accounts. So there’s no reason an adult child should be gifted the money without some of that taxpayer-subsidized growth being repaid.

Yeah. Spend it.

And remember that residential real estate is one of the only serious paths to untaxed (and unfair) family and generational wealth. Since we cling to the anachronistic principal residence capital gains exemption, there is zero tax on all of years of equity growth a house may experience when passed on in an estate.

Real estate benes can include spouses, children, relatives, friends, charities or a German Shepherd (in trust). If the place was owned in joint tenancy with right of survivorship (the norm), the surviving joint tenant (spouse) automatically becomes the sole owner, and the property is not subject to probate. But passing the house on to a child does trigger the estate administration tax. (Relax, it’s not a stiff levy.)

Bottom line; send mom to Vegas. Expect nothing.

Now, here’s Jim, a dual citizen (US) who lives in Canada, and lusts for a fat TFSA.

“Is there an ear you could drop this in for the up coming talks between Canada and the US? To allow the TFSA to be used by US citizens in Canada?” he asks.

“I have tried over the past few years in Canada to speak with my MP, various Senators, Treasury, Finance, and CRA. In the US I have reached out to the congressman and senators associated with my US address, Department of the Treasury, and IRS. All in both countries have replied with form letters. I have also considered requesting a determination letter from the IRS. As it would only apply to me and may be rescinded I have held off. Under the expectation of talks between the US and Canada I hoped you may have a connection to get past the gate keepers.”

Nope. But the good news is that giving TFSAs in Canada the same treatment as IRAs in the US – as legitimate tax shelters recognized by the tax treatment between nations – has been discussed in Congress. But of course that was pre-Trump. So, like logic, common sense, predictability and adult behaviour, it is currently dead in Washington.

The TFSA is not considered a pension-type account under the Canada-US tax deal, giving the IRS (technically) dibs on any interest, capital gains or dividends earned within one. Another reason to consider renouncing your citizenship (which is not easy).

This means if you file in the US as well as Canada – which you’re obligated to do – TFSA earnings should be included as taxable income, and no foreign credit is available. Worse, holding ETFs or mutual funds in the tax-free account means more paperwork, since they are considered to be ‘passive foreign investment companies’. Don’t forget to adhere to the FBAR (Report of Foreign Bank and Financial Accounts) plus the Foreign Account Tax Compliance Act, which needs to be copied to the Financial Crimes Enforcement Network. (The IRS is anal.)

Oh, and liquidating a TFSA for a dually is a taxable event. All gains are hit, plus an extra 4% or so may click in because of the Net Investment Income Tax.

Yes, Jim, it’s nuts. Maybe Elon should go and DOGE this whole reporting/taxation thing.

For dual citizens or Americans living long-term in Canada as permanent residents you have two realistic options. Don’t open a TFSA and suffer the significant financial loss in that decision, or have one and ignore the weenies in Washington.

Easy choice.

About the picture: “Thank you for your tireless efforts with this blog. I can’t imagine how much work is involved, but it’s greatly appreciated,” writes Ian in Toronto. “I’ve attached a photo of our Aimee, all 8 lbs of her. Unfortunately, she left us last weekend. She absolutely loved everyone and it was difficult to get a picture of her without a blurry tail. The world could sure use more Aimee right now.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.