Defer or Prefer to Incur?

When not to do a spousal rollover

After a good long run, Dad died midway through his 99th year. Mom and us kids will miss him dearly, but it was his time.

Customarily, everything would roll over to Mom, the sole beneficiary, who is nearing her mid-90s. This approach gets around the tax on deemed dispositions at death that would otherwise erode Dad’s estate. But could we do better for her?

It’s a mantra of financial planning that, whenever possible, it’s best to arrange beneficiary designations and joint accounts to allow streamlined continuity to a spouse. But it’s important to pause and consider whether to opt out, particularly for deaths early in the year. Dad died in January, with only a couple of weeks of income, so there remained plenty of room to make use of his basic personal credit and low-bracket tax rates.

Here are some of the steps we took.

Pension Rollover

To begin, we gave notice to the administrator of the defined benefit pension that was my parents’ primary income source. As surviving spouse, Mom will continue with a reduced pension, underscoring the need to be tax-conscious with her other income sources. There won’t be any residual value when she dies, but with the two of them living well into their 90s, they got their fair actuarial share out of the deal.

Rrif On Death

Mom handled the house when we were youngsters, followed by a lengthy run as a school trustee. Dad took early retirement at age 60, then kept busy with teaching and consulting gigs into his 70s. Thus, despite having a dependable pension, both had moderate accumulation in Registered Retirement Income Funds

(RRIFs), each naming the other as beneficiary. Their financial advisor (a friend to us all) readied the paperwork to roll Dad’s RRIF to Mom.

Acting under power of attorney (POA), we instead declined the receipt of the RRIF on Mom’s behalf. Accordingly, the amount will be included in Dad’s finalyear income, soaking up the remainder of his basic personal credit (i.e., at zero tax), with the rest subject to the lowestbracket rate.

Rrif Minimums

In their later years, we have been managing all of my parents’ finances under POA. This included providing instructions on taking the minimum RRIF withdrawal early in the year. We hadn’t yet had this year’s meeting when Dad died.

The RRIF minimum, based on the preceding year-end value, must be paid in the following calendar year. According to the Canada Revenue Agency and the administrator’s practice, because it had not been paid before Dad’s death, that portion had to be paid and taxed to Mom as the named beneficiary (though, as noted above, the bulk had been declined, to be taxed with Dad’s final-year income).

Tfsa Rollover

One great thing about a Tax-Free Savings Account (TFSA) rolling over to a spouse, is that it continues to be a TFSA without requiring or using up the receiving spouse’s TFSA room. However, unused TFSA room does not roll over to a spouse or to anyone else. Fortunately, Mom and Dad were consistent TFSA contributors, and the combined amounts were now in Mom’s hands. That said, there was some lost room for Dad’s final year because he had not yet made the year’s contribution.

BY DOUG CARROLL

Tfsa Without A Beneficiary

For registered accounts in Ontario (and most common-law provinces), attorneys under POA cannot initiate or change beneficiary designations. However, many financial institutions will carry over an existing designation on an incoming registered plan. This was helpful as we were consolidating financial holdings at a time when my parents’ faculties had significantly declined.

Unfortunately, Dad had one small TFSA without a designation. As we could do nothing about it, probate was inevitable for Dad’s estate. On the bright side, it bolstered our decision to allow the RRIF to fall into the estate, with the projected income tax savings well exceeding the nominal bump in probate tax.

JOINT NON-REGISTERED ACCOUNT

The proceeds from Mom and Dad’s home sale years ago went into their joint non-registered investment account. That money helped service their later accommodations, while also appreciating nicely. This account bypassed probate, with Mom continuing as sole legal and beneficial owner by right of survivorship.

By default, capital property rolls over at the adjusted cost base to a spouse on death. This applies when the capital property is held in a joint account, as in this case. It would also have applied if Dad had an account under his name alone that was then migrated to Mom as estate beneficiary (as long as the individual securities in the account were not sold in the process).

Alternatively, Dad’s estate can elect out of the automatic rollover, on a per-property basis. This will allow us to optimize for Mom’s future needs by choosing which securities to roll over, and which to have taxed on Dad’s final return. As Mom could conceivably blow right past Dad to the century mark and beyond, that extra financial flexibility will be welcome comfort for her as she moves into this next chapter.

BY KEVIN WARK