Tag: Estate

Who pays the tax on mom’s RRIF at death?

Sibling stressors, legal rules, moral dilemmas

Some of the largest dollar value estate planning decisions we make are the naming of beneficiaries on registered plans. 

By doing so, the plan proceeds go directly to the named beneficiary/ies, rather than falling into the estate of the deceased. This bypasses exposure to estate creditors and probate tax, as well as the potential delay of having to pass through the estate. 

But while making a beneficiary designation streamlines both time and cost of distribution, the tax result could present an unexpected dilemma for the recipients.

Why is there tax on registered plans at death?

A registered retirement income fund (RRIF) is the payout form of what originated as a registered retirement savings plan (RRSP). Together they are legally-authorized income deferral arrangements. When a person dies, there is no more future deferral time, so the arrangement is generally terminated. 

The main exception is a tax-deferred rollover to a spouse (or possibly to a dependent child), but otherwise the account value is brought into the deceased’s income in the terminal year. 

Who is responsible for paying the tax?

Absent a rollover, and assuming for the moment no named beneficiary, a deceased’s RRIF will be paid to the estate. 

It is the executor’s job to deal with the deceased’s debts, with tax liabilities being top of the list. The RRIF proceeds can be used to pay the tax associated with its terminal income inclusion, and the net remaining funds are then available to be distributed to estate beneficiaries along with other estate assets.

Does a beneficiary designation avoid income tax?

If the deceased had named a beneficiary on the plan, the gross proceeds would be paid in accordance with that designation. However, despite that no money flowed into the estate, the RRIF would still have been included in the terminal year income, the tax on which remains the estate’s responsibility.

But who actually bears the tax?

If the estate has insufficient assets, the CRA can follow that RRIF into the named beneficiary’s hands and require payment of the deceased’s tax on that amount. Otherwise with a solvent estate, if the RRIF beneficiary/ies and the residual estate beneficiary/ies are different, then the latter effectively bear the tax on the former’s RRIF receipt. 

What did mom know, and what did she want? – Jeffrey’s dilemma

That last situation was the subject of a recent conversation with Jeffrey. He and his brother were named as beneficiaries of their mom’s RRIF, while they and their sister were the three estate beneficiaries. It was openly known that mom intended the brothers to get the RRIF, but it was unclear if she was aware of the tax rules. 

While everyone got along fine, the sister could potentially have questioned mom’s knowledge and intention at the time of making the beneficiary designation. Whether that would be successful before a judge would depend on the facts and available evidence, but it would be certain to hurt family relations and cost money.

The brothers, who were also the executors, looked into whether there was an accepted practice in such cases. Ultimately, it came down to a moral decision, and they decided that they two would bear the tax. 

In all, it’s a reminder that even apparently simple decisions could have unexpected effects. While it’s impractical for you to have each RRSP or RRIF designation legally reviewed as made, the topic should be on the agenda next time you’re with your estate planning lawyer, to be sure they properly reflect your intentions and expectations.

Estate doesn’t own deceased’s Maple Leaf tickets, and is instead a constructive trustee

At issue       

Sometimes estate assets have commercial value, other times emotional attachment, and frequently both. That last situation is ripe ground for estate disputes.

I have a friend who was a shareholder in a business corporation which owned Toronto Maple Leaf season tickets used to entertain clients. When the team moved from the Gardens to its new home at Air Canada Centre, the new tickets (and this may have been true of the old ones) were required to be held in his personal name, not in the name of the corporation as they had been at the time. When the corporation was wound down a few years later, one of the shareholders bought out the tickets, and they all shook hands and called it a day.

Their amicable resolution contrasts sharply with a recent case where an estate’s claim to Leaf tickets was opposed by the deceased’s business colleagues. But first, here are a few cases as warmups to the main event.

Fobasco Ltd. v. Cogan, 72 O.R. (2d) 254 [1990]

When major league baseball arrived in Toronto in 1976, Cogan subscribed for eight Blue Jays season tickets. Six of the eight tickets were subsequently offered to and paid for by the plaintiffs. Cogan advised in 1986 that he would soon cease making the tickets available to the plaintiffs, and though the dispute was settled for a time, he stopped sharing the tickets in 1989 when the Jays moved into the Skydome.

The plaintiffs failed in all their arguments under contract, resulting or constructive trust, and fiduciary duty. Importantly on the trust arguments, the judge found that Cogan initiated the purchase for his own benefit vis-à-vis the Blue Jays, then extended an offer to the plaintiffs.

Byers v. Foley, 16 O.R. (3d) 641 [1993]

The parties were members of a men’s softball team that decided to purchase Toronto Blue Jays season tickets beginning in 1983. Two of the teammates were designated to make the arrangements, and their names were recorded in the official records. In 1989 those two advised the others that they were no longer going to share the tickets.

The plaintiffs commenced an action based on constructive trust. As both the certainty of subject-matter (the tickets) and objects (the parties) were ascertained, the only issue was whether the third certainty of intention to create a trust had been met. In distinction to Fobasco v. Cogan, the purchasers acted on behalf of the group from the beginning, leading the judge to hold that the purchasers held the tickets as trustees throughout.

Trustee of estate of A.M.K. Investments Limited v. Kraus, (1996) 42 CBR (3d) 227

Kraus was listed as the licence holder for Toronto Raptors season tickets. His corporation, AMK, paid for and used the actual tickets. After AMK was petitioned into bankruptcy by its creditors, Kraus contended that he continued to own the ongoing licence.

The judge acknowledged the distinction between the licence and ticket purchase, but found on the facts that AMK funded the cost of both. Kraus was held to be trustee under a purchase money resulting trust in both respects, and was ordered to transfer the licence to AMK.

Anspor et al v. Neuberger, 2016 ONSC 75

Chaim Neuberger and Harry Sporer emigrated from Poland to Canada, launching a successful construction business in partnership as Nuspor. In the late 1960s or early 1970s, a business contact brokered a deal for the two to purchase Toronto Maple Leaf season tickets from its then-owner Harold Ballard. They were advised (incorrectly, though nothing turns on the point) that the tickets could not be held by Nuspor, so they decided to register in Neuberger’s name alone.

After Neuberger’s death in 2012, his daughter as executor took the position that the tickets were his personally, and in turn belonged to the estate. The plaintiffs argued that Nuspor was always the beneficial owner, with Neuberger (and later the estate) serving as trustee.

As in Byers, the facts and surrounding conduct showed that the tickets were being acquired for Nuspor, not Neuberger personally. Furthermore, and akin to AMK v. Kraus, Nuspor paid all amounts, thus satisfying the requirements of a purchase money resulting trust. The executor was ordered to transfer the tickets to Nuspor.

Practice points

  1. Though these cases all involve Toronto franchises, a quick search of news and legal databases reveals that the issue crosses many borders – both geographic, and between here and the hereafter.
  2. Inherent in the estate cases is that a person cannot pass on a better title than was held during life. Indeed, the estate will be bound by any restrictions imposed upon the living person, and will likely be required to extricate itself from any continuing involvement.
  3. Whatever the commercial requirements of any sports club, it would be a good idea for any pooled ownership arrangements to be backed-up by clear documentation acknowledged by all purported owners and trustees.

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.