Inherited RRSP Tax Canada: Deemed Disposition, Rollovers, and Cross-Border Rules

The Deemed Disposition Rule

Canada's approach to inherited RRSPs is blunt. The CRA treats the entire fair market value of an unmatured RRSP or RRIF as if it were fully cashed out immediately before the owner's death. The full balance gets included as taxable income on the deceased's terminal tax return — the final return filed for the year of death.

For a large RRSP, this can be devastating. A $500,000 RRSP balance added to the deceased's other income can push the terminal return into the highest federal marginal bracket, plus provincial tax on top.

The terminal return is due by April 30 of the year following death, or six months after the date of death — whichever is later.

The Spousal Rollover Exception

The deemed disposition tax can be completely deferred when the RRSP beneficiary is a "qualified beneficiary." The most common qualified beneficiary is a surviving spouse or common-law partner.

A qualified spouse can roll the inherited RRSP directly into their own RRSP or RRIF under Section 60(l) of the Income Tax Act. The income inclusion on the terminal return is offset by an equal deduction, and the surviving spouse assumes the deferred tax liability — they'll pay tax when they eventually withdraw the funds.

Other qualified beneficiaries include:

• A financially dependent child or grandchild under 18 (funds can be used to purchase an annuity payable until age 18)
• An infirm dependent child of any age (eligible for rollover to their own RRSP or RDSP)

Everyone else — adult children who aren't financially dependent, siblings, friends — triggers the full deemed disposition. The estate pays the tax, and the beneficiary receives whatever remains.

Named Beneficiary vs. Estate as Beneficiary

If the RRSP names a specific individual as beneficiary, the funds transfer directly to that person outside of probate. The estate still owes the deemed disposition tax on the terminal return, but the beneficiary receives the full RRSP value.

This creates a fairness problem: the estate (and by extension, all other heirs) bears the tax burden for income that flowed to one specific beneficiary. Some provinces allow the executor to seek reimbursement from the beneficiary for their proportionate share of the tax, but the rules vary and disputes are common.

If the estate is named as RRSP beneficiary, the RRSP value flows through the will and is distributed according to the estate plan. Probate fees apply (ranging from 0% to 1.695% depending on the province), but all heirs share the tax burden proportionally.

Cross-Border Trap: US Residents Inheriting a Canadian RRSP

When a US resident inherits a Canadian RRSP, two tax systems collide. The deemed disposition tax applies on the deceased's terminal return — that's a Canadian tax obligation regardless of where the beneficiary lives.

The US beneficiary receives the distribution as capital (not income), because the tax was already paid by the estate. This means it's generally not taxable again in the US, though it must be reported on IRS Form 3520 if the value exceeds reporting thresholds.

The trap is post-death growth. Any interest, dividends, or gains that accrue inside the RRSP after the date of death are taxable in both countries:

• Canada imposes a 25% non-resident withholding tax on post-death growth (potentially reduced to 15% under the US-Canada tax treaty)
• The US requires the beneficiary to report the post-death growth on their US return

The US beneficiary can claim a foreign tax credit on Form 1116 for the Canadian withholding to avoid double taxation, but the paperwork is real and the timing matters.

The practical move: don't let the RRSP sit after the owner's death. Withdraw and close the account quickly to minimize the post-death growth that triggers dual-country taxation.

Filing the Terminal Return

The executor is responsible for filing the deceased's terminal return, including the RRSP income. This requires the T4RSP slip from the RRSP issuer (showing the deemed disposition amount) and the date-of-death value statement from the financial institution.

The retirement account claims guide covers the full Canadian RRSP claim process, including the terminal return procedure, spousal rollover mechanics, and cross-border coordination for US-Canada beneficiaries.