Wealth Update – Successor Owners and Annuitants – Non-registered Accounts

Thanks for all the comments regarding last week’s newsletter on Joint Ownership with Rights of Survivorship.

A few comments were about successors named in segregated fund contracts.

Here’s a quick summary of how non-registered insurance-investments can be set up so that, in the spousal situation, capital gains taxes can be deferred to the second death. 

As we are aware, we have the “spousal rollover rules” as defined by the CRA. In essence, at the time of death, a person’s assets can rollover to their surviving spouse on a tax deferred basis. Rather a straightforward process for RRSP/RRIF, LIRA/LIF and TFSAs. 

It’s a bit more subtle for non-registered assets. Non-registered assets can rollover in-kind to a surviving spouse without triggering capital gains taxation. More specifically, capital property (property that can have either capital gains or losses) can transfer in-kind to the survivor. So, for example, a stock portfolio can move across to a surviving spouse without triggering a capital gain.

But, here’s the rub, this can’t work with segregated funds where the spouse is the annuitant and there is no successor annuitant, and no successor owner named. Reason being, at the time of death, the contract pays out and the contract is closed. The amount paid out will be in cash. Cash is not a capital property and therefore cannot be rolled over to the spouse on a tax deferred basis.

So, in the event the client has an accrued capital gain in a segregated fund at the time of death, those capital gains will have to be reported when the final tax return is prepared. If, on the other hand, the surviving spouse had been set as the successor annuitant and successor owner, the contract would become the property of the survivor and the segregated fund contract would continue with the survivor as the new owner and annuitant thus deferring any taxation on the capital gain until the death of the surviving spouse.

And, we must consider one more thing, the guarantees at death. In the event, at the time of death, a death benefit top-up is required, the benefit will be topped up only if there is no successor annuitant. If there is a successor annuitant, the contract will continue and only the market value will transfer to the successor owner/annuitant (with the exception of Industrial Alliance).

However, in the event a top-up is being required, there probably will not be a capital gain issue because the account most likely is underwater at the time of death.

We’ve tried to express this situation as best we can. Here’s a rule of thumb that may be useful when discussing with clients whether or not to add a spouse as a successor annuitant and successor owner: with 75% death benefit guarantees, add the spouse as a successor annuitant and successor owner as a top-up is less likely; with 100% guarantees, weigh the value of the guarantee vs. the potential tax bill at the time of the first death.

As an aside, for RRIFs, LIFs and TFSAs, we often put spouses as successors, which is fine. However, if a spouse is a beneficiary instead of a successor, and the first spouse passes away, it is still possible to transfer the proceeds at death into the survivor’s RRSP/RRIF, LIRA/LIF or TFSA. The executor of the deceased’s estate can make this happen.

If you have any questions regarding this topic, please let us know.

P.S. Remember all the great resources in the QFS Investment Toolbox. These can be found at qfscanada.com under the Advisor Portal, within the Advisor Toolbox.