Can a trust avoid tax on a deceased person’s RRSP?

A trustee’s tax liability has limits, a court case suggests

In February 2010, a woman learned she had only months to live and took steps to put her financial affairs in order. She executed a codicil naming one of her three daughters as executor of her estate. She named the same daughter the beneficiary of her RRSP, the only significant property she owned.

The woman told her daughter to use the RRSP proceeds to pay for the funeral, related family travel costs, final bills and estate administration expenses, and to distribute any residual funds equally with her two sisters. 

When she died, the woman owed more in back taxes than the $76,616 in her RRSP. On receiving the RRSP proceeds, the daughter paid the expenses and distributed the rest as instructed. The Canada Revenue Agency (CRA) later assessed the daughter personally for the RRSP’s full amount.

In February 2021, the Tax Court handed down its ruling of the daughter’s appeal in Goldman vs. the Queen 2021 TCC 13.

How the CRA follows a tax debt

When someone who owes tax gratuitously transfers property to a non-arm’s length person, the CRA may use Section 160 of the Income Tax Act (ITA) to collect the tax debt from the recipient. 

Consider a deceased taxpayer with an insolvent estate and an RRSP with named non-arm’s length beneficiaries. An RRSP is included in income in the terminal tax year when someone dies. The CRA will use Section 160 to collect from each beneficiary the proportionate share of tax owed from the RRSP income.  

The Goldman case had an additional element: there was an existing tax debt that was larger than the entire RRSP even before the mother’s death. What is the extent of the liability for a named beneficiary in such a situation? And would receiving RRSP proceeds as a trustee make a difference? 

Effect of a trust

The judge found that the three certainties for creating a trust had been met: the mother’s intention and identification of her daughters as beneficiaries were both clear, and her death caused the RRSP proceeds to fund the trust.  The daughter received those proceeds in her capacity as trustee and was legally bound to carry out the terms of the trust as laid out by her mother.

As to the CRA’s contention that the daughter used her discretion to pay certain expenses instead of paying the CRA, the judge stated that she “received the RRSP proceeds to hold for the benefit of certain beneficiaries. The CRA was not one of those beneficiaries. However, that does not cause the trust to fail for certainty of object. The fact that the [government] dislikes the terms of a trust is not enough to declare it void.”

Even so, the court made it clear that Section 160 isn’t defeated by a trust. Rather, the question is whether the tax liability rests with the trust itself or with the trustee in their personal capacity. The judge said the trustee’s responsibility is to use the trust assets to satisfy tax debts, and that if those assets are insufficient, the tax collector “cannot simply seize the trustee’s personal assets.”

So who bears the tax?

Though the daughter wasn’t liable as trustee for the full RRSP proceeds, she was liable for three amounts:

  1. A total of $8,139 was paid out of an account originally opened jointly for the daughter to care for her mother. Though these payments were in the nature of final expenses contemplated by the trust terms, they weren’t paid out of the RRSP proceeds. While the judge suggested that a reimbursement might have qualified per the trust’s terms, there was no evidence of any such reimbursement to this account from the RRSP proceeds.
  2. The daughter was liable, as she conceded, for her $10,460 distributed portion of the RRSP residue.
  3. Lastly, the daughter claimed $5,000 for legal expenses for the tax appeal. The judge ruled this was the daughter’s personal expense and not an estate expense.

The judge commented that, under a different ITA section that applies to trustees, the daughter could possibly be liable for the residue distributions to her two sister beneficiaries. However, that was not pleaded by counsel for the CRA. The court didn’t assess the two sisters’ liability.

In the end, the daughter was liable for $23,599. If the two $10,460 amounts (the residue to each of the other two sisters) were added, the total would be $44,519. Deduct that from the original $76,616 in the RRSP, and that leaves $32,097. Depending on your perspective, that’s either lost tax revenue or a tax-effective way to pay final expenses.

As this case proceeded under the Tax Court’s general procedure, it could stand as a precedent, so it will not be surprising if the government appeals. Regardless, if you have a client who is the executor for someone with tax debts, it would be prudent for them to clarify their obligations with legal counsel in order to steer clear of potential personal liability.

To sleep, to wake, to make better financial decisions

Here’s one of those Running Thoughts … Despite (because of?) the pandemic, I’ve been making a point to get out for a run whenever the weather even closely accommodates, and otherwise I’ve been keeping up with my indoor workouts. Either way, the earphones are in, so I’m getting in more audiobooks and podcasts.

I just got through a rather lengthy book this afternoon, Why we sleep from Matthew Walker. This link takes you to Walker’s author page, where you’ll find  a link over to Amazon if you want to buy the book – OR, you can  do as I did, and borrow it from your local library. In my case, I listened to it on cloudLibrary.

While I didn’t think I was all alone in having occasional sleep challenges, Walker provides an eye-opening view (sorry … typed that before I realized how cheesy, but I’m leaving it) of just how prevalent and problematic sleep challenges can be. He reinforces over and over how drowsiness is worse than drunk driving (in terms of its statistical frequency, not morally speaking).

My own sleep challenges

As a young(er) adult, like many I thought I was almost immune to sleep problems. Once our babies were on the bottle, I was the primary night-feeding designate, as I could be done and back to sleep almost immediately, often 2 or 3 times on a given night. My belief was bolstered (to my detriment) by the ease with which I could rise early for flights, adapt to time zone changes and hotel beds, and fall asleep right after coming back in the door. (Hmm, those regular absences  might also explain why I was on tap for baby bottles when I was home.)

Things changed in recent years, with changing job responsibilities, changing jobs altogether, and just changes in me due to age (this last one not boding well, given that I’m not yet at the age when this is more commonly a concern).

Thoughts on sleep and personal finance?

Your ability to focus is significantly impaired if you are not getting 7-9 hours of sleep consistently. Despite the bravado claims of people who burn the candle at both ends, they are paying for that now, and will pay for it in future in terms of weakened health, frayed relationships and reduced life expectancy.

The simplest application of this material is that one should be careful to be well-rested before making any significant financial decision.

And as financial decisions go, a house purchase is the biggest for most of us. If you have been going through bidding  wars, you can literally be losing sleep for weeks on end. Walker’s research shows that your cognitive ability declines in a measurable way when this happens. With the very personal nature of a home purchase, there’s a danger that your emotional drive could overtake your logical side. With so much on the line, it’s important to stay alert so you can keep those two influences in balance.

Walker explains how you can’t catch up on lost sleep one night by simply adding the same amount the next. He emphasizes that it doesn’t fit the analogy of accumulating credits that you cash in later.

Looking now at real credit and debt management, that’s the classic situation where people may lose sleep. Your ability to appreciate, analyze and manage your debt will be compromised if you can’t bring your best brain to bear. Staying awake at night (possibly intentionally) could take you down a spiral that causes large and long-term harm. That’s not to suggest that it will automatically be easy with a good night’s sleep, but if you are able to get that sleep then you give yourself much more of a fighting chance.

Walker’s recommendations for good sleep health

Walker has 12 recommendations, and I’m noting here the key points that stood out for me. You can check out the book yourself for the full list:

  1. Have a regular sleep time. This is #1 for a reason! In fact it’s even more important to have an alarm that tells you when to go to sleep than one that tells you when to get up.
  2. Go to bed only when you’re sleepy, and avoid sleeping on the couch
  3. Avoid daytime napping if you’re having trouble sleeping at night. And if you are a napper, don’t do it after 3pm.
  4. Again if you’re having problems, don’t lie in bed more than 20 minutes dwelling on getting to sleep. Get up and do something relaxing until the urge to sleep returns.
  5. Remove anxiety producing worries by learning to decelerate before going to bed.
  6. Understand how the chemical attributes of nicotine, caffeine and alcohol affect sleep, and how they affect your own sleep.

And one last thing … exercise can contribute to greater sleep consistency. Be  sure though to finish 2-3 hours before bedtime so that your body is sufficiently cooled down.

The case for CPP at 70

Why and how advisors can help

[A version of this article appeared in Advocis Forum February 2021]

While playing charades over the holidays, my youngest son stumbled with “a bird in the hand is worth two in the bush”. Eventually we guessed it, and I explained to him that it means accepting a sure thing now rather than holding out for something potentially bigger later.

Coincidentally, that adage also featured prominently in an item on my holiday reading list. It’s a research paper[1] about delaying Canada Pension Plan retirement benefits, released in late 2020 by the National Institute on Ageing and the FP Canada Foundation.

My long-held opinion has been to take at 65, unless there are compelling reasons to start earlier. After reading this paper, I’m now leaning toward 70 as the default position.

When we’re starting CPP, and why

The majority of Canadians – 7 out of 10 – take their CPP retirement pension at either 60 or 65. Less than 5% take after age 65, and only 1% wait until 70. The study’s author, Bonnie-Jeanne MacDonald, attributes this pattern of early uptake to a combination of lack of advice, bad advice and ‘bad “good” advice’.

The bad advice includes the emotional pull of the bird-in-the-hand: ‘If you die early (so the argument goes), you’ll leave money on the table, so take CPP as soon as you can’. However, the only guarantee is that your payments start sooner, not that you’ll receive more. And ironically, the early uptake may in fact increase the likelihood that you will receive less, as we’ll see following.

The ‘bad “good” advice’ is the mainstream practice of using a breakeven age. It compares two starting ages, say 60 and 65, focusing attention on whether you will reach the age when the cumulative receipts are the same. This plays to our behavioural tendency to favour the near-term (from first age to second age to breakeven age), thereby undervaluing the lifetime income security that CPP offers. On top of that, academic research shows we tend to underestimate our life expectancy, making it even more likely to choose the earlier start. 

According to Canada’s Chief Actuary, life expectancy at age 60 is 85.9 for men and 88.5 for women. In my own experience, I’ve never seen a suggested breakeven/crossover age much over 80. This has long been my discomfort with this approach, as you are betting on being in the ‘dies-before’ half of the cohort population. You lose (statistically) simply by being average, and it gets worse the longer you live.

Measuring the dollar difference

Early uptake would not be a concern if it in fact leads to a better financial outcome. To test this, MacDonald departs from the breakeven approach, favouring a calculation of the current dollar value of the expected loss, or “Lifetime Loss”.

For someone with average life expectancy entitled to the median CPP income who takes at 60 rather than delaying to 70, the Lifetime Loss in current dollars is over $100,000. 

The model factors-in the drawdown of RRSP/RRIF savings until the CPP begins. Including this component, it finds that most people will still be much better off by bridging this way, than by taking CPP early and stretching their RRSP/RRIF money over the expected retirement years.

Notably among the scenarios canvassed in the paper, someone entitled to the maximum CPP pension who lives close to age 100 (a 25% probability from age 60 according to the dataset used), the current dollar loss can exceed a quarter of a million dollars.

Advisors have a key role

To be clear, Lifetime Loss is not intended to be applied without consideration of individual circumstances. There are many situations where it would make sense to begin early, such as when there is a known life-limiting health condition, or when someone is trying to preserve income-tested benefits or shield against the Old Age Security clawback.

For most people, it’s a challenge just to identify all the contributing factors in making such a decision, let alone evaluate the trade-offs among them. It’s both technically complicated and emotionally charged, which together can be overwhelming. 

In addition to being a dependable information source, financial advisors can guide their clients by applying some of the lessons of behavioural finance:

  • Loss aversion holds that we feel the pain of loss twice as much as the joy of gain, which is what Lifetime Loss illustrates in concrete terms. 
  • It also frames the discussion on the more likely scenario of longevity, as opposed to early death.
  • Lastly, it anchors at the later age of 70, to be lowered as the analysis warrants rather than having to make the uphill battle from age 60.

Ultimately the decision should be informed by individual particulars and reliable evidence. In the latter respect, I recommend this paper as a helpful resource for all financial advisors. 

1 https://www.fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf