Tag: Beneficiary

RRIF rollover allowed via joint election between deceased’s estate and grandson

At issue

On death, a person’s property is deemed disposed, including funds held in registered retirement savings plans and registered retirement income funds. The RRSP or RRIF value is brought into income in the deceased’s terminal year. In addition to triggering taxation sooner than the family may wish, this can contribute to a higher tax bill than anticipated due to the lump sum being taxed in a single year.

Relief is available by certain tax-free rollovers to qualified beneficiaries: a spouse, a dependent minor child, or a disabled dependent minor or adult child. Commonly this can be achieved through direct beneficiary designation on the plan, or alternatively if the funds have fallen into the estate then by joint election between the deceased’s personal representative (executor) and a qualified beneficiary who has a sufficient entitlement as an estate beneficiary. The procedure for spouse beneficiaries is typically straightforward, but could be more complicated with a minor or mentally infirm individual.

Putting the focus on minors, even if there is a remaining surviving parent, that parent is generally the automatic guardian of the child’s person but not of property. Approval of the provincial public trustee or other court order will be necessary to make the election and execute a legal contract for the required annuity to age 18 – and having those funds in such a young person’s hands without oversight is likely not a desirable result. These hurdles were addressed in a unique fact situation in a recent advance income tax ruling from the Canada Revenue Agency (CRA).

Income Tax Act (ITA) Canada

Paragraph 56(1)(t) and parts of section146.3 – These provisions work together to allow the value of a RRIF to be a designated benefit (income inclusion) of a beneficiary rather than the deceased/estate.

Section 60.011 – A lifetime benefit trust may be established for a minor child or grandchild who was dependent on a deceased by reason of mental infirmity. A qualifying trust annuity may be purchased with the trust funds.

Paragraph 56(1)(d.2) and section 75.2 – These provisions cause income paid to a qualifying trust annuity to be included in the income of the trust beneficiary.

CRA 2016-0627341R3 (E) – Rollover of RRIF proceeds after death

The exact date of this advance income tax ruling is redacted, but it was issued some time in 2016.

The minor child was adopted by his grandmother because his parents were incapable of caring for him. A court issued a parenting order providing that the grandmother had “all powers, responsibilities, entitlements of guardianship and decision-making regarding the grandson.” Furthermore, it was clear that he was financially dependent on her and no-one else.

Unfortunately a difficult situation got worse when it was determined that the grandmother had a terminal medical condition. As part of arranging her affairs, she named her son as executor under her will, and executed an authorization for that son and his wife to apply to adopt the grandson (presumably their nephew). Two RRIFs came into the grandmother’s estate upon her death, the combined value of which was less than the grandson’s share of the estate.

The proposal to CRA goes into a number of steps, including reference to the above ITA sections, essentially having the RRIF go by tax-free rollover to an annuity that will pay out over the years until the grandson reaches 18. The payments will be received by the trust, but will be taxable to the grandson whose basic personal tax credit will negate much or all of any tax.

In approving the proposal, the CRA acknowledges the dual-purpose to reduce taxes otherwise arising on the grandmother’s death and to allow the executor to maintain control over the funds. Though not stated in the ruling, take note that the minor child must have had a mental infirmity in order for ITA s.60.011 to have applied. This also skirts the issue of having the minor enter into the contract for the annuity, as it is the executor/trustee of the lifetime benefit trust who carries out that purchase.

Practice points

  1. Directly naming minors or mentally infirm individuals as RRSP/RRIF beneficiaries may enable tax deferral, but it does not resolve all complications and hurdles.
  2. Though there is only brief mention of the grandmother’s parenting court order and the presumed/forthcoming adoption order in the ruling, those seem to have facilitated the process. Together with the child’s apparent mental infirmity, an acceptable result is obtained.
  3. More generally, all parents and guardians of minors should be conscious of the need to coordinate beneficiary designations with will provisions to satisfy their estate planning needs.

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.

No spousal rollover where beneficiaries assign rather than disclaim RRSP

At issue

When a person dies, RRSP holdings are generally brought into income in the deceased’s terminal tax year.  However, where there is a beneficiary designation to a spouse (or certain dependents), a tax-deferred refund of premiums enables a rollover to the recipient’s RRSP.

Alternatively, the RRSP may be paid into the estate if there is no valid designation in place, or if the estate itself is named as beneficiary.  Either way, it is possible to make a joint election with the estate to effect a similar rollover, assuming the spouse or other qualified beneficiary has sufficient entitlement in the estate.

IT-500R Registered Retirement Savings Plans – Death of an Annuitant (Archived) 

This interpretation bulletin (now archived) includes CRA’s past guidance on dealing with RRSP rollovers.  (Such bulletins are administrative only, and specifically are not binding legal authorities.)

It includes reference to RRSP joint elections between an estate and a spouse, and the potential to use them when other beneficiaries have disclaimed their interests in an estate.  This requires that the spouse’s estate entitlement is at least the value of the RRSP, and is not available if the spouse is only entitled to a portion of the RRSP or if under an intestacy the spouse only receives specific assets other than the RRSP.

There is no discussion of the effect of a named beneficiary of an RRSP disclaiming such interest.

Estate of the late John Arthur Murphy v. Her Majesty the Queen, 2015 TCC 8 

John Arthur Murphy died in Nova Scotia in 2009.  Despite owning a home, farm property, forest properties, rental properties, cottages and livestock, he had no Will – His estate was an intestacy.

Mr. Murphy’s heirs were his spouse Barbara DeMarsh and three adult children from a previous marriage (“the Murphys”).  There were ebbs and flows in the dispute that followed, including claims under matrimonial and intestacy law.  Eventually a Consent Order was filed with the court in May 2011, providing (among other matters) that the Murphys take all necessary steps to “release, convey and transfer to and in favor of [Ms. DeMarsh] any and all interests that they may have in” an RRSP worth $237,026, on which they had been the named beneficiaries.

The particular RRSP had been reported in Mr. Murphy’s terminal tax return, filed in April 2010.  To give effect to the agreement and enable a rollover to an RRSP with Ms. DeMarsh as annuitant, the estate requested a T1 adjustment in August 2011.

The CRA denied the request, leading to the present appeal in which the estate argued that the Consent Order had the effect of indefeasibly vesting the subject RRSP in Ms. DeMarsh retroactive to the time of Mr. Murphy’s death.

The judge disagreed.  A disclaimer is a refusal to accept a gift, after which the disclaiming party has no right to direct who is to receive the gift.  In this case, the Murphys did not disclaim their interest in the subject RRSP, but rather they settled the litigation by transferring their interest in the RRSP to Ms. DeMarsh.  In the judge’s view, the settlement “is not a disclaimer but an assignment.”

The RRSP proceeds remained as income to the estate, with no refund of premium allowed to roll over to an RRSP for Ms. DeMarsh.

Practice points

  1. Mr. Murphy’s lack of a Will (and the resulting intestacy) contributed to uncertainty and delay generally, and arguably factored into the substance of the outcome.
  2. The settlement dealt with assets and issues well beyond the subject RRSP, including contingencies like the potential that the T1 adjustment might be denied.  While the judgment rested at least in part on the text of the settlement, the chosen words may have been necessary to preserve the broader agreement.
  3. Though not discussed in the case, generally RRSP rollovers must occur by December 31 of the year following death.  Had the estate been successful on the core issue, it may still have faced a hurdle on this administrative requirement.