Article content

Q. My spouse is near the end of her life and she has approximately $60,000 she wants to transfer to her son to be used for her two grandchildren’s education. I suggested she could transfer the amount to her son’s registered retirement savings plan (RRSP) while living without triggering any tax implications. He has the contribution room available. No one agrees with me. What is the best and cheapest way to get these funds to her son for the grandkids? And is the RRSP contribution a good way of doing it? If not, is there something better? We have already topped up both of my grandkids’ registered education savings plans (RESPs). —Thanks, John

Article content

Article content

Article content

FP Answers: I am sorry to hear about your spouse’s health issues, John. Planning at a time like this can be difficult.

Article content

Article content

From a tax standpoint, Canada does not have gift or inheritance tax, but several provinces have estate administration tax or probate that can range from a few hundred dollars to as much as 1.695 per cent of the value of an estate. From that standpoint, if she left the $60,000 to either your son or grandchildren at death, those funds would likely be subject to probate if they passed through your spouse’s will. Keep in mind that U.S. citizens could face gift or estate tax implications that may or may not apply in this case.

Article content

Also, if these funds are left to her son via her will probating the will could take several months, which means a delay in receiving any funds. The major perceived downside of gifting the funds now would be the loss of control of the money as it changes ownership.

Article content

If your spouse’s funds are currently held in her RRSP account, there would be tax on her withdrawal. RRSP withdrawals could be taxed at marginal rates in the 20 per cent to 50 per cent range depending on what other income your spouse has in the year of withdrawal. Similarly, at death the RRSP is considered to be withdrawn in full and the amount will be added to that year’s income tax return. Whether the funds are withdrawn during her lifetime or at death, and even if her son is a named beneficiary, the proceeds are taxable to your spouse.

Article content

Article content

To be clear though, John, if these funds are in your spouse’s RRSP, she cannot transfer them directly to her son’s RRSP on a tax deferred basis. She will have tax on the RRSP withdrawal and he may save tax with his RRSP contribution.

Article content

Article content

Assuming your spouse gives $60,000 to her son, it would be his choice to make an RRSP contribution or not. If he has contribution room as you stated and his income falls into a high enough tax bracket he will have a tax refund for making this contribution. The deduction for this contribution could also be carried over to a future year and deducted over multiple years if it made sense or he could even provide the money to his spouse to make a spousal RRSP contribution to an RRSP in his name. If there is a desire for these specific funds to flow directly to the grandchildren someday a separate RRSP could even be established listing them as beneficiaries (which is revocable).

Article content

The problem with this strategy is that if the goal is for the ultimate beneficiary of the gift to be the grandchildren, having her son put the money in his RRSP may not be the best way to implement the strategy. If your spouse wants him to withdraw from his RRSP for educational expenses for her grandkids, he may be in a higher tax bracket at that time, making the strategy less beneficial.