Non-Resident Beneficiary in Canada: Life Insurance, RRSP and TFSA Rules
A non-resident beneficiary is someone named to receive money after a death who lives outside Canada, and naming one is allowed: a beneficiary does not have to be a Canadian citizen or live in Canada. What changes is how each kind of money is taxed and paid. A life insurance death benefit is paid tax-free, while growth earned in an RRSP, RRIF or TFSA after the death, and income an estate pays out, has Canadian non-resident tax withheld at 25% unless a tax treaty lowers the rate.
| What is left | Taxed in Canada for a non-resident? | Who deals with it |
|---|---|---|
| Life insurance death benefit | No, it is paid tax-free | The insurer |
| RRSP or RRIF | Growth after death, through withholding | Plan issuer; executor files final return |
| TFSA | Growth after death, through withholding | TFSA issuer or the executor |
| Inheritance through the estate | Income withheld; the inheritance is not | The executor |
Do beneficiaries need to be Canadian citizens?
No. Sun Life's beneficiary guide, under the heading "Foreign beneficiaries allowed", says a beneficiary can live in another country with no requirement to be a Canadian resident, and the Canada Revenue Agency (CRA) has tax rules written for non-resident beneficiaries. What counts for tax is where the person lives, not their passport; the FAQ below gives the CRA's test.
Choosing a beneficiary in the first place, including contingent beneficiaries and trustees for minors, is covered in How to Choose a Life Insurance Beneficiary. This article covers what changes when that person lives abroad, under the rules outside Quebec, which has its own provincial tax return and civil law.
Get a Free Quote →Life insurance for a beneficiary living outside Canada
Canada does not tax the death benefit itself. The Financial Consumer Agency of Canada calls it a one-time, tax-free payment, the CRA lists most amounts received from a life insurance policy after a death among amounts that are not taxed, and Sun Life's guide says the beneficiary receives the full amount without paying income tax on it.
Two large insurers' claim forms show what to expect from abroad:
- One form each. Canada Life wants a separate claimant's statement from each beneficiary, and its address lines allow for a state and a zip code.
- Getting paid. Both forms offer a cheque or a direct deposit, and the deposit must go to an account at a Canadian financial institution. A beneficiary with no Canadian account should ask the insurer how it pays someone abroad before filing.
- Minors. A minor's claim is made for them, by a parent or tutor on Canada Life's form, and Manulife defines a trustee as someone appointed to receive the proceeds for a beneficiary such as a minor. Naming one is covered in the beneficiary guide above.
RRSP and RRIF: what a non-resident beneficiary receives
Where the beneficiary lives does not change the CRA's starting point. As a general rule, when the annuitant of an RRSP or RRIF dies, the CRA considers that they received the plan's full fair market value immediately before death, reported on their final return, and a beneficiary pays no tax on any amount that can reasonably be regarded as included in the deceased's income. The cost to the estate, and the rollovers that can defer it, are covered in Death Duties in Canada: What the CRA Actually Takes When You Die.
What is taxable to the beneficiary is the income the plan earns after the death. (A spouse, a common-law partner, or a financially dependent child or grandchild can also receive a refund of premiums, which shifts that income from the deceased's return to theirs.) Paid to someone abroad, that taxable part falls under non-resident withholding: the CRA's guide for non-residents lists RRSP and RRIF payments among the income on which Canadian payers must withhold non-resident tax at 25%, and its RRSP page says that rate applies unless reduced by a treaty.
The plan issuer reports these payments on an NR4 information return and gives the beneficiary an NR4 slip, the Statement of Amounts Paid or Credited to Non-Residents of Canada, by the end of March after the year of payment. How a RRIF pays out during the holder's lifetime is in RRIF Withdrawal Rules: Minimums by Age.
TFSA: what a beneficiary living abroad receives
Only a spouse or common-law partner can be a TFSA successor holder, who takes over the account itself, and the CRA's rules allow for one who lives abroad: a non-resident successor holder cannot contribute while a non-resident but may withdraw at any time, and one without a Social Insurance Number (SIN) should apply for an Individual Tax Number on Form T1261.
A child, a friend, or a spouse not named as successor holder is a designated beneficiary instead. The CRA says a payment based on the account's fair market value on the date of death is not taxable in Canada. Anything paid above that value during the exempt period, which ends at the end of the calendar year after the year of death unless the trust holding the account ceases to exist sooner, is subject to non-resident withholding tax and reported on an NR4. The CRA adds that the earnings may also be taxable in the beneficiary's country of residence.
Inheritances through the estate: the executor's extra duties
The inheritance itself is not income: the CRA lists most gifts and inheritances among amounts that are not taxed. The extra work falls to the executor, because the CRA treats an estate as a testamentary trust:
- Withholding. Income an estate pays a non-resident beneficiary is taxed as trust income, whatever the estate earned it from, with 25% withheld unless a treaty lowers it. The CRA gives the Canada-United States treaty rate on these amounts as 15%.
- A T3 return. The estate must file one for any year in which it allocates any portion of its income to a non-resident beneficiary.
- NR4 slips. The beneficiary gets one no later than 90 days after the end of the estate's tax year.
- The clearance certificate. An executor who distributes assets without one is personally liable for any unpaid tax, up to the value distributed. The request (Form TX19) needs the names, addresses and tax identification numbers of beneficiaries who receive property other than cash.
The executor's whole job, start to finish, is in Executor Duties in Canada: A Step-by-Step Guide.
More on this topic: How to Choose a Life Insurance Beneficiary · Death Duties in Canada: What the CRA Actually Takes When You Die · Executor Duties in Canada: A Step-by-Step Guide
A life insurance beneficiary in the US: the IRS side
For a beneficiary in the United States, IRS Publication 525 says life insurance proceeds paid because of the insured person's death generally are not taxable, unless the policy was turned over for a price or acquired in a reportable policy sale, though interest received as a result of the proceeds may be taxable. An inheritance brings a reporting duty instead: a US person who receives more than US$100,000 in a tax year from a nonresident alien or a foreign estate, counting related foreign persons together, reports it on Part IV of Form 3520, filed separately from the tax return. A cross-border tax adviser can confirm how either rule applies.
Checklist when a beneficiary lives outside Canada
- Give each insurer and plan administrator the beneficiary's current address and country, and update it when they move.
- Name a contingent beneficiary on every policy and plan.
- Tell the executor who lives where, and where the policies and plan statements are kept.
- Ask each plan issuer how it pays and reports to someone abroad, and whether it wants Form NR301 for a treaty rate.
- Point a beneficiary in the US to a cross-border tax adviser before the money arrives.
This is general information on federal rules outside Quebec, drawn from the CRA, the IRS and two insurers' claim forms. Treaties, provincial law and each plan's terms can change the result, so confirm your own case with a cross-border tax adviser before money moves.
Sources
- Canada Revenue Agency: Rates for Part XIII tax; T4058, Non-Residents and Income Tax; Tax rates on withdrawals; RC4177, Death of an RRSP Annuitant; RC4178, Death of a RRIF Annuitant; Payments to non-residents of Canada; T4061, NR4 - Non-Resident Tax Withholding, Remitting, and Reporting; Filling out the NR4 slip; How non-residency affects your TFSA; Definitions for TFSA; More information on forms NR301, NR302, and NR303; Filing a trust's T3 return: Who should file; Apply for a clearance certificate; Amounts that are not reported or taxed; Electing under section 217; Who can elect
- Financial Consumer Agency of Canada: Life insurance
- Internal Revenue Service: Publication 525, Taxable and Nontaxable Income; Gifts from foreign person
- Sun Life: Life Insurance Beneficiary Rules in Canada
- The Canada Life Assurance Company: Claimant's statement (form 17-8242)
- The Manufacturers Life Insurance Company (Manulife): Claimant's Statement (form NN0760)
Frequently Asked Questions
Is a Canadian citizen living abroad a non-resident for tax purposes?
Citizenship does not decide it; residential ties do. The CRA treats you as a non-resident if you normally, customarily or routinely live in another country and are not considered a resident, or if you have no residential ties here and either live outside Canada all year or stay in Canada less than 183 days in the tax year. A home, a spouse or dependants in Canada are significant ties, while a Canadian passport is only a secondary one.
Does a minor need a SIN number to be a beneficiary?
Not necessarily. Insurers ask for one for tax reporting, but Manulife's claim form tells a claimant who has never been assigned a SIN to write "No number", and a parent or trustee claims for a minor. For a beneficiary abroad, the CRA tells payers filling out an NR4 slip to ask whether a tax number is available from the person's country of residence.
What if my beneficiary moves out of Canada after I name them?
The designation can stay as it is, since a beneficiary may live in another country. The tax follows them: Canadian payers withhold non-resident tax on certain income they pay or credit to non-residents, so residence when the money is paid is what counts. Send the insurer and each plan administrator the new address.
Can a non-resident beneficiary get back tax withheld from an RRSP or RRIF?
Sometimes. The CRA says the tax withheld is usually a non-resident's final tax obligation to Canada on that income, but most RRSP and RRIF income qualifies for an election under section 217 of the Income Tax Act. That return taxes the income at the same rate as Canadian residents and may refund all or part of the tax withheld, so ask a tax adviser to compare.
How does a beneficiary in the US get the lower treaty rate on estate income?
By giving the payer, which for an estate means the executor, a completed Form NR301 confirming that they are the beneficial owner of the income and a resident of the United States. The CRA says the form is not mandatory, but if a non-resident refuses to certify those facts when asked, the full statutory rate should be withheld. Estate payments go on the form as trust income.
