Selecting a beneficiary


A little knowledge about the process and the rules surrounding beneficiaries can help you make your decision.

When you open a registered investment account you are required to designate one or more beneficiaries. Doing so ensures that upon your death, your assets go to the individual(s) or entity that you choose. (If you do not name one, your assets default to the estate.) For some, naming a beneficiary can be fairly straightforward—everything rolls over to the surviving spouse or is divided equally amongst the children. But for others who have divorced, remarried, or find themselves in unique circumstances, it can be a little more complicated.

Regardless of your personal situation, it’s important to choose your beneficiaries carefully. Visualizing what the world will look like after you’ve passed is a helpful tool. Will your children need money for post-secondary education? Will your parents need help to pay for medical expenses or assisted care living? Is there a charity you wish to support? A little knowledge about the process and the rules surrounding beneficiaries can help you make your decision.

Who can you name as a beneficiary?

With any registered account (RRSP, RRIF, TFSA) you can designate anyone as your beneficiary—a partner, relative, friend, neighbour, estate, or charity. There are no restrictions.

Keep in mind, though, that only registered accounts are allowed beneficiaries. You cannot designate a beneficiary for non-registered or cash accounts. Cash accounts must go through the estate.

Primary and contingent beneficiaries

A primary beneficiary is first in line to receive named benefits. There can be one or multiple primary beneficiaries. In cases of multiple primary beneficiaries, assets are distributed at the percentages you allocate.

Contingent (secondary) beneficiaries only receive benefits if the primary beneficiaries have died. Most couples designate their spouse as their primary beneficiary and their children as contingent beneficiaries. Assigning a contingent beneficiary can be useful for avoiding potential probate (the legal process for validating a will) fees.

Tax implications

It’s important to know that it is the estate—not the beneficiary—that is responsible for paying tax on accounts.

If your beneficiary is anyone other than your spouse or child dependents, your estate will be left with the tax bill. For example, if you left a $100,000 RRSP for your nephew instead of your partner, upon your death your nephew would receive the full $100,000 but your estate would be left to pay the taxes. If you didn’t own a house and the only money you had was that RRSP, just know that the executor of your estate would be on the hook for paying the tax.

Generally, the most tax efficient way to deal with registered plans is to roll them over to a surviving spouse. Another option is to allocate some of the money to a beneficiary and some to the estate.

Tax Free Savings Accounts (TFSA)

Beneficiaries of TFSAs will receive the full amount with no tax burden whatsoever. TFSAs allow spouses to be named as “successors,” which means they can combine the assets in the account into their own TFSA.

Locked-in accounts

A locked-in account is essentially a pension that has been transferred out of the pension provider. Certain locked-in accounts (e.g. LIRA, LIF, LRIF) have restrictions about who can be named as beneficiaries. Legally these accounts require your spouse or legal partner to be named as the beneficiary. However, if you wish your locked-in account to go to someone other than your surviving spouse or partner, he or she can waive their spousal entitlement (in the manner set out by the Pensions Benefits and Standards Act).

If you have no surviving spouse or legal partner, your locked-in accounts may be transferred to your estate and/or beneficiaries of your choice.

Updating your will should also include updating your beneficiaries

Your will should be updated every few years or anytime there is a material change, e.g. marriage, divorce, birth/adoption of children, etc. It is all too common for people to neglect making changes to their will and their beneficiary designations when significant life changes occur. This can result in ex-partners remaining as unintended beneficiaries while new partners, children, and other more preferable beneficiaries are left out in the cold.

For any other questions or concerns regarding beneficiaries please speak to your investment advisor or counsellor or contact us at info@mawer.com.