Many Canadians work hard, save consistently, and build significant RRSPs with the hope of leaving something meaningful to their children. Yet without proper estate planning, a large portion of those savings can end up going to taxes instead of family. A real Ontario case illustrates how quickly this can happen when both spouses pass away and no tax-efficient estate plan is in place.
A Real Case: From Retirement Savings to a Large Tax Bill
An Ontario couple accumulated over $700,000 in RRSPs and also owned a family cottage. When the first spouse passed away, her RRSP transferred to her husband tax-free, as allowed under Canadian rules for spousal rollovers. Later that same year, the surviving spouse also passed away. At that point, his entire RRSP was treated as taxable income in a single year, and capital gains tax became payable on the cottage. The combined result was more than $660,000 going to the Canada Revenue Agency, leaving far less than expected for their children.
RRSPs: Great for Retirement, Risky for Estate Tax
RRSPs (and later RRIFs) are powerful tools for building retirement income because contributions are tax-deductible and growth is tax-deferred. However, at the death of the last spouse, the full value is generally included in income for that final tax return, unless there is a qualifying rollover to a dependent child with a disability or similar special case. This can push the estate into the highest tax brackets and often results in a large portion of the RRSP/RRIF value being paid in tax. For families with cottages, rental properties, or non-registered investments, capital gains tax adds another layer of liability at death.
Using Permanent Life Insurance to Protect the Estate
One common strategy to help manage this tax risk is to pair retirement savings with permanent life insurance. A properly structured permanent policy, such as whole life or universal life, can provide a tax-free death benefit that is specifically designed to offset RRSP/RRIF taxes and capital gains. When set up as a joint-last-to-die policy on a couple, the benefit is paid when the second spouse passes—exactly when the final tax bill comes due. In many cases, the total premiums paid over time can be significantly lower than the tax that would otherwise reduce the estate, allowing more of the estate value to flow to children, grandchildren, or charities instead of being lost to tax.
Bringing It All Together: Retirement and Legacy
For many Canadians, the goal is twofold: enjoy their savings during retirement and still pass along a meaningful legacy. A coordinated approach that uses RRSPs or RRIFs for income, while using permanent insurance as a tax- and estate-planning tool, can help achieve both. Thoughtful planning can turn a potential large tax liability into a manageable cost and help ensure that the people and causes you care about benefit from the wealth you worked so hard to build.
Important Disclaimer
This article is for educational purposes only and does not provide financial, tax, or legal advice. Everyone’s situation is unique, and Canadian tax and estate rules can be complex. Before implementing any strategy, speak with a licensed advisor and, where appropriate, a tax or legal professional. The case described here is based on a scenario reported in Canadian sources, and no private or identifying client information has been disclosed.