Do RRIF beneficiaries pay tax?
Essentially, a beneficiary may be on the hook for the tax payable if there is not enough money left in the estate. This could apply if a RRSP or RRIF is the primary or sole asset of an estate. However, it is an important consideration if a RRSP or RRIF beneficiary is different from the beneficiary of the remainder of the estate when figuring out who gets what from an estate.
Does a beneficiary pay tax? Can that tax be deferred?
If a RRSP or RRIF beneficiary is the spouse or common-law partner of the deceased, or if they are the beneficiary of the estate of the deceased, it may be possible to defer tax, Gay. This tax deferral can apply if the proceeds are transferred to their own RRSP or RRIF by December 31 of the year following the death of the account holder.
In this case, a T4RSP or T4RIF slip will instead be issued to the spouse beneficiary who would claim the income and could also claim an offsetting deduction on their tax return to avoid taxation.
Future withdrawals would be taxable to the spouse beneficiary over time. It does not matter if either the transferring or receiving account is a RRSP or a RRIF. It also does not matter if the beneficiary spouse does not have a RRSP or RRIF, as they can open one to receive the transfer.
Beyond a spousal beneficiary, a financially dependent minor child or grandchild, or a financially dependent mentally or physically infirm child or grandchild may also qualify for a tax deferred transfer.
The nearing deadline to convert RRSP to RRIF
In your case, Gay, if you turned 71 this year, you are correct that December 31 is an important date. You must convert your RRSP to a RRIF by that deadline, or purchase an annuity from a life insurance company, as your RRSP cannot exist thereafter.
Regardless, if you are a RRIF beneficiary and the spouse of the deceased, you can transfer the amount into your RRSP or RRIF, so the timing of converting your own account will not matter for purposes of the transfer.
If you are not the spouse of the deceased, and you are not their financially dependent or mentally or physically infirm child or grandchild, there is no tax relief. Again, the tax would be paid by the executors of the deceased out of their estate and the income and tax would not be on your tax return.