Beneficiary Designations

A beneficiary is a person or organization (such as a charity or scholarship fund) you name to receive your assets. While you can name anyone, beneficiaries are often a spouse, children, other family members, or close friends. You can also name multiple beneficiaries and assign different percentage shares.

It’s good practice to review your beneficiary designations annually, or after any major life event (e.g., marriage, divorce, birth of a child). It's also helpful to inform your beneficiaries that they’ve been named.

Types of Beneficiaries

There are three main types of beneficiary designations:

• Revocable

• Irrevocable

• Contingent

  
  

Revocable

• Can be changed at any time without consent from the beneficiary.

Irrevocable (typically not recommended)

• Cannot be changed without the written consent of the named beneficiary.

• If a minor is designated as an irrevocable beneficiary:

  • The policy is automatically frozen until the minor reaches the age of majority in your province.

  • A parent, guardian, or trustee cannot authorize a change on behalf of the minor.

    
    

Note: in Quebec a spouse or civil union partner is automatically irrevocable unless you state otherwise. Common law partners or anyone else are automatically revocable unless stated otherwise.

Contingent

• A contingent beneficiary is a “backup” who receives the assets only if the primary beneficiary is unable or unwilling to do so (e.g., they predecease you or refuse the inheritance)

Benefits of naming a beneficiary

Most investment and insurance products allow you to name a beneficiary without needing a lawyer or accountant. That said, it’s wise to be aware of the legal implications of your choices and seek advice if your situation is complex.

Three Key Reasons to Name a Beneficiary

1. Your Beneficiary May Receive More Money

Designating a beneficiary allows the assets to pass directly to them, bypassing your estate. This avoids:

• Probate,

• Potential legal fees,

• Delays in distribution, and

• Possible tax implications

Without a named beneficiary, assets may be reduced before reaching your loved ones.

2. It Maintains Privacy

Wills become public once they go through probate. Beneficiary designations, on the other hand, are private. Only the named individual or organization is informed.

This can help:

• Avoid family tension or disputes,

• Reduce feelings of inequality (“getting my fair share”), and

• Leave funds to someone not named in your will.

3. It Simplifies Transfers to Your Spouse

If your spouse is named as your RRSP beneficiary, the account can transfer directly and tax-free to their RRSP through a spousal rollover—which happens automatically unless you opt out.

Even if your spouse has no contribution room, the rollover still applies. Your financial institution can typically handle the process:

• Without needing a lawyer,

• Without delay, and

• Without triggering probate fees (which vary by province and may be substantial depending on account size).

Special Note on TFSAs

If you're married, it's often better to name your spouse as the successor holder (not just a beneficiary) of your TFSA:

• As a successor holder, your spouse becomes the new account owner immediately upon your death, with no disruption in tax-free growth.

• If your spouse is only listed as a beneficiary, they:

  • Receive the TFSA funds tax-free,

  • Must close the account, and

  • May face taxation on any growth between the date of death and reinvestment.

They can contribute the funds to their own TFSA without using contribution room, but only if:

• They file the correct form with the CRA, and

• The transfer occurs by December 31 of the year following death.

  
  

Note: The successor holder designation is not available in Quebec.

While you can’t take your money with you, naming beneficiaries ensures your savings go where you intend—with fewer delays, lower costs, and less stress for your loved ones.

What Happens if You Don’t Name a Beneficiary?

If no beneficiary is named, your life insurance or savings plan proceeds will go to your estate.

Once in the estate:

• Proceeds may be used to pay outstanding debts,

• May be subject to probate fees, and

• Any remaining funds will be distributed according to your will.

However, if you have named both a primary and a contingent beneficiary, and the primary is no longer available, the proceeds will go to the contingent.

What Happens to Your Estate If You Name a Beneficiary?

When you name a beneficiary on a registered asset—such as an RRSP, RRIF, or life insurance policy—those assets bypass the estate entirely and are paid directly to the named individual. This means they do not form part of your estate and are not subject to probate fees. However, this setup can create unintended consequences if not carefully planned.

Tax Liability Risks for Executors

Even though the beneficiary receives the funds directly, the tax liability on registered assets (except TFSAs) still falls to the estate. On death, most registered accounts (like RRSPs and RRIFs) are treated as if they were fully cashed out, and the entire value is added as income to the deceased's final tax return.

If the executor distributes the estate without retaining sufficient funds to cover this tax bill, they may be personally liable to the Canada Revenue Agency (CRA) for any shortfall. Executors must ensure they understand the tax implications of all estate assets—including those that pass outside the estate—before proceeding with distributions.

Spouse/Common-Law Exception

There is an important exception: when a spouse or common-law partner is named as the beneficiary of a registered account, the tax consequences can be deferred. The registered account can be rolled over tax-deferred to the spouse’s own registered account, provided the proper conditions and paperwork are met. In this case, there is no immediate tax triggered on the value of the account.

Additional Considerations

TFSAs: These are not taxable upon death. However, any gains after the date of death may be subject to tax if the TFSA is not designated as a successor holder.

Non-registered assets (e.g., personal investments or real estate not jointly owned) form part of the estate and are subject to probate and potential capital gains.

Life insurance proceeds paid to a named beneficiary are also generally not taxable, and they bypass the estate.

Creditor exposure: Assets that bypass the estate may be protected from estate creditors, but this can create issues if the estate has debts and no assets to cover them.

Best Practices

Ensure your executor is aware of any named beneficiaries on your accounts.

Regularly review beneficiary designations to align with your overall estate plan.

Consult with a financial planner or estate lawyer to assess whether your estate will have sufficient liquidity to cover taxes and debts.

Probate: The legal process that confirms the validity of your will and the appointment of your executor.