RRSPs vs. FHSAs on Death: Who Actually Pays the Tax?
When advising on estate planning and registered plans, one issue that continues to catch taxpayers and practitioners off guard is how different registered vehicles are taxed on death. Although Registered Retirement Savings Plans (RRSPs) and First Home Savings Accounts (FHSAs) share many similarities during a taxpayer’s lifetime, their treatment on death is fundamentally different.
The key distinction is straightforward but critical: RRSPs generally produce an income inclusion to the deceased at death, while FHSAs generally produce an income inclusion to the post-death beneficiary or the estate. This outcome is not accidental—it flows directly from how each regime is structured in the Income Tax Act.
RRSPs: Taxation Falls on the Deceased
For RRSPs, death itself is the primary taxing event. Subsection 146(8.8) is the operative rule. It deems the annuitant to have received, immediately before death, a benefit equal to the fair market value (FMV) of all property held in the RRSP at that time. That deemed benefit is then brought into income under subsection 146(8), which requires benefits out of or under an RRSP to be included in computing the taxpayer’s income for the year.
Read together, these provisions mean that an RRSP is typically fully taxed on the deceased annuitant’s terminal return. While there are important relieving provisions—most notably where a spouse is entitled to the RRSP under a matured plan, or where a “refund of premiums” is paid to a spouse or qualifying dependent—the conceptual starting point does not change. Death generally triggers a deemed receipt by the deceased, and the tax liability arises in the deceased’s final year.
This structure explains why long-standing administrative positions of the Canada Revenue Agency consistently describe RRSP death taxation as falling first on the deceased annuitant. Subsequent payments to beneficiaries are typically excluded from their income to the extent those payments can reasonably be regarded as amounts already taxed in the deceased’s hands.
FHSAs: Taxation Shifts to the Beneficiary or Estate
The FHSA regime takes a very different approach. Notably, there is no provision that deems a deceased FHSA holder to have received the FMV of the account immediately before death. Instead, the charging provision operates after death and focuses on the recipient.
Subsection 146.6(14) is the core inclusion rule. It requires amounts distributed from a deceased holder’s FHSA to, or for the benefit of, a beneficiary to be included in the beneficiary’s income for the year. The deceased holder’s terminal return is not the focal point.
An arrangement will cease to be an FHSA at the end of the year following the year of death of the last holder. If the FHSA is not fully distributed before it ceases to be an FHSA, subsection 146.6(17)(c) supplies the mechanism that forces the issue. Where the last holder is deceased at the time the arrangement ceases, the provision deems the proportion of the FMV of the FHSA property that a beneficiary is entitled to receive to have been distributed at that time to the beneficiary, for purposes of subsection 146.6(14). The resulting income inclusion arises in the beneficiary’s hands—or in the estate’s hands—not in the deceased holder’s hands.
This result has been expressly confirmed by the CRA. In administrative guidance (CRA views document 2024-1005791C6), the CRA concluded that where there is no successor holder and no distribution is made before the end of the exempt period, the deemed distribution at cessation is included in the income of the FHSA beneficiary. Importantly, there is no corresponding income inclusion to the deceased holder at the end of that period.
Why This Matters for RRSP-to-FHSA Funding Strategies
The distinction becomes especially important where an FHSA has been funded with transfers from an RRSP. Direct RRSP-to-FHSA transfers are expressly permitted under paragraph 146(16)(a.2). These transfers are not deductible as FHSA contributions and consume FHSA participation room rather than restoring RRSP deduction room.
If a transfer exceeds available FHSA room, the holder may have an excess FHSA amount and face monthly penalty tax exposure during life. That compliance issue, however, is analytically separate from how the account is taxed on death.
Once funds are transferred, they are simply FHSA property. They do not retain their RRSP character for death-tax purposes. In particular, those funds do not revert to being taxed under the RRSP deemed receipt rule in subsection 146(8.8). Instead, any post-death actual or deemed distribution is governed entirely by the FHSA rules—subsection 146.6(14), with subsection 146.6(17)(c) providing the deemed distribution if the FHSA remains undistributed when it ceases.
The Takeaway
Although RRSPs and FHSAs are both tax-sheltered vehicles that typically provide deductions on contribution, they diverge sharply at death. RRSPs generally tax the deceased at death; FHSAs generally tax the beneficiary or estate after death. For estate planning, beneficiary designations, and RRSP-to-FHSA funding strategies, understanding this structural difference is essential to avoiding unexpected tax results.