Strategy to reduce tax exposure on RRSP/RRIF accounts using TFSA and segregated funds

Ken Greig - Apr 05, 2022

Strategy to reduce tax exposure on RRSP/RRIF accounts using TFSA and segregated funds


Many people believe their RRSP/RRIF accounts will pass to the beneficiary named on their account tax free. This is true when the account passes to a spouse, as there are provisions in the Income Tax Act that allow transfer on a tax-deferred basis, deferring the taxation to the death of the last spouse. When the beneficiary named is a child or other person, and not a spouse, the funds will go to that person, however the tax obligation will stay with the estate. This creates a significant tax exposure to the estate when there are substantial funds left in the registered plan.


To illustrate this, let’s look at the following scenario.


Husband and wife have diligently saved throughout their lifetime and have $300,000 in their RRSP plan. They turn that RRSP into a RRIF and start to draw the minimum amount required by legislation. They don’t need to draw anymore, as their other pensions cover their living expenses and needs currently. They want to use their money wisely and save it in case they need long-term care later in life. They’ve named each other as beneficiary for each of their accounts and then want anything left over to go to their children in equal shares. They each have an income of $35,000, and they have their home and some non-registered investments in GICs at the bank. They don’t have any TFSA accounts,

as they did not understand how they can work.


The issues here are as follows:


Their RRIF accounts will continue to grow and create more tax exposure to the estate of the last surviving spouse. The $300,000 included in the terminal tax filing as income will be taxed at the highest marginal tax rate of 49.8%. That means $149,400 in taxes payable.

They’re paying tax on their non-registered investments at their highest marginal tax rate because GICs are interest-only growth.

The GICs may not be keeping up with the rate of inflation, so the buying power of that money is shrinking


Recommendations would be:


1.  Calculate how much addition money could be taken out

of the RRIF without significantly raising their marginal

tax rate.


2.  Start a TFSA account for both the husband and the wife and deposit the non-registered funds and excess income taken from the RRIF into those TFSA accounts up to the maximum contribution room. (This year $6,000 to the maximum of $69,500 if no back-contributions have been made.) Name each other as the successor owner of the accounts and not as beneficiary. On the death of one spouse, the surviving spouse will take over as successor owner and have double the amount of contribution room. The surviving spouse then names the children as the beneficiaries of both accounts.

At the death of the last spouse, all the funds in both TFSAs will pass down to the children with NO TAX.


3.  Any funds that cannot be deposited to the TFSA accounts can be placed in a segregated fund that has a 100% death benefit guarantee. The couple can be confident that no matter what happens in the markets, they will always be guaranteed that the funds they put in will be going to the beneficiaries (their children) tax free. The investments chosen still have to match the person’s risk tolerance, but the seg fund guarantee limits any worry about market fluctuations. Seg funds can also alleviate the inflation risk they faced with the GICs.


This strategy is simply repositioning of the assets, so they’re more tax efficient and will reduce estate taxation. More money will go to the children and less money to Canada Revenue Agency.


Every situation must be examined on its own merits and results will vary based on many factors. The numbers and tax rates used are consistent with current (2020) regulations and legislation, which can change from time to time. Consult your professional advisors for details in your own case.


If you have questions, please feel free to contact me at 250-668-8699 or via email at