Upon the death of the second spouse, if the first spouse's RRSP was rolled over to the surviving spouse's RRSP, what is the tax implication for the estate of the second spouse regarding those funds?

Question: Upon the death of the second spouse, if the first spouse's RRSP was rolled over to the surviving spouse's RRSP, what is the tax implication for the estate of the second spouse regarding those funds?

Answer options: ✅ The full balance of the funds will be included in the second spouse's income for tax purposes in their terminal year unless rolled over to a dependent child/grandchild.

• The rollover rules apply again, deferring taxation to a third generation.
• Only 50% of the funds will be taxed in the second spouse's terminal year.
• The funds become tax-exempt as they have already been rolled over once.

Correct answer: The full balance of the funds will be included in the second spouse's income for tax purposes in their terminal year unless rolled over to a dependent child/grandchild.

Explanation: Upon the death of the second spouse, the tax-deferral usually ends, and the full market value of the RRSP/RRIF will be included as income in the deceased's terminal tax return, unless there's a further eligible rollover to a financially dependent child or grandchild, as per subsection 146(8.2) of the Income Tax Act.