Today’s blog was written by Kelsey Buchmayer, associate with the Ottawa office of Gowling WLG (Canada) LLP

Registered plans are an important factor to consider in an individual’s estate planning, whether it’s from a tax-planning perspective, bypassing probate and probate fees, or distributing assets in a specific manner. There are however some nuances when it comes to registered plans that should be kept in mind.

1. Appointing a Successor Holder for a Tax-Free Savings Account (“TFSA”)

While the appointment of designated beneficiaries to TFSAs is a commonly known strategy to have such assets flow outside of an estate, if that beneficiary is a spouse they should be appointed as a successor holder.

Upon the death of the TFSA holder, a successor holder, which is limited to the deceased’s spouse or common-law partner, is entitled to all of the rights of the deceased holder. By acquiring these rights, this successor holder is entitled to the deceased’s TFSA contribution room in addition to their own, resulting in potentially doubling the already available tax-saving potential. If a successor holder has their own TFSA, they would be able to consolidate the accounts, which CRA considers a qualifying transfer that does not affect available TFSA contribution room.[1]

The designation can be made through the TFSA contract (if permitted by the legislation of the jurisdiction) or by Will.

Furthermore, an individual is not limited in choosing between appointing a successor holder or designating regular beneficiaries, rather they can combine both strategies with alternate beneficiaries becoming entitled if the successor holder is predeceased.

2. Designations for a Registered Education Savings Plan (“RESP”)

Some may believe that if they die while they still have funds in their RESPs, the individuals they have designated as “beneficiaries” will automatically be entitled to these funds, but this is not correct.

Despite having “registered” in its name, RESPs are not included as one of the prescribed plans set out in Part III of the Succession Law Reform Act[2], which covers the types of plans that can be designated to beneficiaries outside of a Will upon the death of a plan holder. Moreover, beneficiaries of RESPs are not beneficiaries upon the death of the contributor, also known as the subscriber, rather they are beneficiaries during the life of the subscriber.

For RESPs to carry on after the subscriber’s death, setting up such accounts with a joint subscriber or appointing a successor subscriber will allow someone to carry on the subscriber role, which means they will be able to make additional contributions, withdraw to beneficiaries, and collapse the RESP if it is no longer necessary.

Otherwise, upon the death of the sole or surviving subscriber of an RESP, unused funds therein will become assets of their estate and no longer continue for the educational benefit of the persons for whom they were initially established.

3. Accounting for gifts over of predeceased beneficiaries designated on registered plans

Assume your widowed client has the common gifting structure in their Will that gives everything to their children in equal shares with the share of any predeceased child to be distributed among their issue, if any. Your client has also designated their children as beneficiaries on their registered plans to ensure such assets flow outside their estate.

If one of their children predeceases them, however, while their Will ensures such child’s share goes to their issue, the proceeds of the registered plan will not – the deceased child’s share will fall to their siblings rather than their issue.

A simple solution is to include a clause in the Will that requires a balancing of the distribution of the residue of the deceased’s estate to offset this unfairness, should it occur, by having the surviving children “bring into account” the share of the registered plan proceeds they received before a distribution of the residue of the estate is made. Such strategy can also be applicable to life insurance policies and jointly held assets.

[1] https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-a-tfsa-holder.html

[2] R.S.O. 1990, c. S.26.