Named beneficiary ordered to reimburse estate for tax on father’s RRIF

At issue

Ever since the Supreme Court of Canada (SCC) decision in Pecore, there seem to be more reported cases where siblings are battling over a deceased parent’s joint account.  In truth, it’s surely no more common now than before, but the arguments – both personal and legal – may be cast differently in the wake of that case. 

Even before that ruling, financial advisors may have been cautious about carrying out such transfers.  As case law continues to build, the scope of concern threatens to press beyond joint ownership and reach out toward beneficiary designations.

2007 SCC 17 Pecore v. Pecore, 2007 SCC 18 Madsen Estate v. Saylor

The SCC held that the presumption of a resulting trust applies when a parent gratuitously (ie., no consideration given) adds an adult child as joint owner of property.  Following the parent’s death, that child would have to prove it was the parent’s intention to pass a beneficial interest, else the child is deemed to hold the property in trust for the estate.  On the respective facts, the daughter in Pecore succeeded and daughter in Madsen did not.

The case has been cited in hundreds of subsequent lower court cases dealing with joint accounts.  One hopes it has also headed off destructive litigation in similar fact situations once the parties had given it sober second thought. 

McConomy-Wood v. McConomy, 2009 CanLII 7174 (ON SC)

This case discussed the potential that the presumption of resulting trust could apply to a RRIF beneficiary designation.  After summarizing Pecore and other potentially relevant cases, the judge stated that it was not necessary to resort to this presumption in order to decide the case.

Rather, there was ample evidence from all parties (including the daughter who was the RRIF beneficiary) that the mother had intended that the three children would “all be treated equally.”  

Morrison Estate (Re), 2015 ABQB 769

In this case, the deceased had four children and eleven grandchildren.  One son, Douglas (who also happened to be the executor) was named as RRIF beneficiary.  Pursuant to the provisions of the Income Tax Act, the estate was responsible for the tax on the deregistered RRIF, while Douglas received the gross $72,683 RRIF proceeds.

As in McConomy, the court grappled at length with whether the presumption of resulting trust could be applied to a RRIF beneficiary designation.  This included considering whether there was a relevant distinction between the inter vivos nature of a joint ownership transfer, and the apparent testamentary nature of beneficiary designations.  In the end, the judge determined that the case could be decided without addressing these issues.

On the evidence, the judge made “a very thin finding” that on a balance of probabilities, the father intended Douglas to be the sole RRIF beneficiary.  However, he went on to infer that the father was either unaware or mistaken how the tax liability would be borne.  Douglas could not be compelled to share the RRIF (as it was his outright), but the judge invoked a provision of the Alberta Judicature Act to find that Douglas was unjustly enriched, and therefore that he must “reimburse the Estate for the tax it paid on his behalf.” [my emphasis]  By the judge’s own admission, his approach was “extraordinary.”

The costs of the son who brought the application were ordered to be paid out of the estate.  Douglas was left to bear his own costs.  

In his closing, the judge voices his concerns over the implications if Pecore is eventually determined to apply to beneficiary designations.  He warns of a “floodgate of litigation against the designated beneficiaries by disappointed siblings.”  One is left to wonder how much this perspective may have fed into the circuitous route used to reach the resolution, particularly as the financial results appear to be similar to what would have happened by recognizing a resulting trust.

Practice points

  1. If possible, a parent should make clear the reason and nature of a joint ownership transfer or beneficiary designation.  Ideally this will be recorded contemporaneous with the event, assisted and informed by independent legal counsel. 
  2. Realistically, such actions are usually undertaken with an eye on informality, privacy and low-cost.  And that likely means that we’ll continue to see cases like these before the courts when disappointed siblings learn the details. 
  3. Financial advisors should always take care in assisting transfers and completing beneficiary designations.  They may also want to keep their own notes, should the ‘right’ facts align and the advisor be called as a witness.

Estate and capacity planning for vacation properties across borders

When I was a boy, we had a modest cottage a couple of hours out of the city.  Just getting there was an adventure, as my parents piled six kids and a dog into a Datsun 510 — with no air conditioning.  

These days, it is not uncommon to have a vacation property in another province or outside the country altogether.  Whether that’s a family getaway, a snowbird retreat, or a new Canadian continuing to hold property ‘back home’, our society lives across borders like never before.  

With this modern mode of living comes complexity, particularly when it comes to estate and capacity planning.  

Wills and estate transfers

Generally a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be.  In order to deal with real estate elsewhere, the Will would have be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it presents some additional cost, time and potential uncertainty.

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction.  In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution.  Accordingly, there must be an open dialogue between the lawyers in the two jurisdictions.  

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor.  This may necessitate adjustments in the home Will, or at least some informal guidance.   Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two.  This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to having to respond to a crisis while an owner is living.  While an estate transfer is a property matter, there are both property and personal issues that can come up while a person is living, with attendant greater urgency.

Powers of attorney (POAs) and powers of attorney for personal care (PAPCs) have been a recommended part of the estate planning process for decades now.  And while it is usually intended that the power may be exercised wherever the grantor or property may be, challenges can crop up when foreign jurisdictions are involved. 

Some jurisdictions require these documents to be executed in a prescribed form, include specific language or otherwise be constrained in some manner that may be at odds with the home jurisdiction’s rules.  Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations — perhaps even requiring them to seek their own legal advice before being able to take instructions. 

As with Wills, it may be desirable to have parallel documents drawn up in the foreign jurisdiction in order to expedite action at critical times.  In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed: 

  • Can the same person be named in both jurisdictions?  Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?  
  • What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)?  If such rules differ between the jurisdictions, how will that be reconciled?  
  • What is the scope of the attorney’s activity for each of the jurisdictions?  Where there is a gap, how will this be handled?
  • If it is intended that the home jurisdiction attorney have ‘final say’, is this possible under the foreign jurisdiction’s rules?  How can an attorney be removed?
  • Is compensation allowed/required/prohibited, and do the planning documents together guard against double compensation?  
  • What checks are there to assure appropriate accounting and accountability for each attorney’s actions? 

Cross-border developments

These concerns have been attracting greater interest in recent years, with two major developments worth noting.

In the summer of 2015, the Uniform Law Conference of Canada tentatively approved a uniform law on cross-border recognition of powers of attorney for both property and health care, health care instructions and similar documents.  The Uniform Law Commission in the United States approved its draft in 2014.  Provinces and states that incorporate the recommendations into their domestic law will enable their residents’ documents to be effective in all reciprocating jurisdictions.

In the area of estates, as of August 17, 2015, a new cross-border succession regulation is in force in the European Union (except Denmark, the U.K. and Ireland).  It affects European citizens and residents, and European property held by non-residents.  Canadians should consult with their lawyer whether any action is required on their part.  

Revised charitable donation tax credit

Will the new math influence your giving?

Much of the tax hoopla following the Liberal election victory was about the implementation of the ‘middle class tax cut’, dropping the federal rate from 22% to 20.5% on the second income threshold, $45,282 – $90,563 in 2016.  That reduction came hand-in-hand with a new 33% bracket for income in excess of $200,000.

But establishing a new rate at the top end required that the government also revisit the rules on claiming the donation tax credit.  Failing that, the new rate structure could have led to an even greater gratuitous break to more than just the ‘middle class’.  The solution preserves the existing treatment for those with income under $200,000, while assuring that high income taxpayers will not be deterred from donating.

Charitable credit structure

Most tax credits are limited to the lower bracket rate, 15%.  For charitable donations, the credit has to now been worth 15% on the first $200 of annual donations, and 29% on amounts over $200.  Respectively, those were the prevailing lowest and highest bracket rates prior to the change.  Thus, not only was a higher rate allowed on large donations, but it was designed to jump all the way to the top personal rate, and it applied irrespective of the person’s income.

The policy purpose of this credit structure is clearly to encourage taxpayers to support worthwhile charitable causes.  The two-tier structure encourages people to donate in excess of $200, and the high rate on the over-$200 portion gives them more bang for their donated buck.  The trade-off for the government is of course lost tax revenue.

Consider someone at roughly $80,000 taxable income making a $10,000 donation in 2015.  (We’ll constrain our analysis to federal taxes here.):  

  • If the donation credit was like most other credits, it would be worth $1,500 based on the 15% rate.  
  • In reality, the credit is $30 on the first $200, and $2,842 on the remaining $9,800 for a total of $2,872.  
  • That’s even better than if the system allowed a donation to be treated as a deduction, which for that taxpayer would have been worth only 22% in 2015, or $2,200.

Sidestepping unintended results

The relevant sections of the Income Tax Act make reference to the “highest percentage” used to calculate an individual’s tax due.  Had the government done nothing more than to adjust bracket rates, on making the same donation in 2016 our donor would receive an extra $400.  (33% – 29% = 4% x $10,000.) 

Clearly for a government trying to manage an expected deficit, this would not be helpful.  

At the same time, if the second tier of the credit is not at the new top bracket rate, those making over $200,000 may be less inclined (in a tax management sense) to make large donations.  

Multi-step credit calculation

In effect, the solution introduces a second test to the second tier of the calculation.  The 15% rate still applies up to $200 in donations, and 29% generally applies thereafter.  However, the higher 33% rate is available to the extent that a taxpayer has income over $200,000.  

To illustrate how this will work, consider that same $10,000 donation made when the donor has taxable income of $203,000.  

  • The first $200 receives a credit at 15% as before.  Of the remaining $9,800 to be claimed, $3,000 is entitled to the 33% credit rate, and $6,800 is claimed at 29%, for a total of $2,992 ($30+$990+$1972).  
  • If taxable income had been over $209,800, the credit would have been worth $3,264 ($30+$3,234).  
  • On the other hand, if taxable income had been below $200,000 as in our $80,000 donor example, it would have been $2,872.  (It is unaffected by the 1.5% bracket reduction.)

With that in mind, for those at or near the $200,000 income level, future years’ donations may require more strategic planning.  When their income fluctuates below that level in a year, they might consider delaying a donation in order to claim a higher value credit in a future year – bearing mind time value of money, and being mindful if this works to the detriment of a charity in current need.