Principal Issues: [TaxInterpretations translation] Questions respecting RRSP at death.
Position: General comments
XXXXXXXXXX 2010-038007 Catherine Ayotte Notary, M.Fisc. July 4, 2011
Dear Sir,
Subject: Treatment of RRSPs at death
This is in response to your letter of September 10, 2010 and our telephone conversation (Ayotte/XXXXXXXXXX) on February 12, 2011 in which you asked us various questions relating to the treatment of an unmatured registered retirement savings plans ("RRSPs") on the death of the annuitant of the plan.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act; any reference to the "Regulations" refers to the Income Tax Regulations.
It appears to us that the situation described in your letter could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions that relate to specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a transaction, you must forward all relevant facts and documents to the appropriate Tax Services Office for their view. We are, however, prepared to provide the following general comments, which may be helpful to you.
Subsection 146(8.8) provides that where an annuitant of an unmatured RRSP dies, the annuitant is deemed to have received immediately before death an amount equal to the fair market value of all the property of the plan at the time of death. Consequently, in the year of death, that amount must be included in computing the income of the deceased annuitant under subsection 146(8) and paragraph 56(1)(h).
Subsection 146(8.9), however, reduces the deemed benefit received by a deceased annuitant under subsection 146(8.8) where amounts qualify as a "refund of premiums" within the meaning of subsection 146(1). The subsection 146(8.9) deduction is discretionary.
The first condition, for an amount to be considered a refund of premiums under subsection 146(1), requires the amount to be paid to an individual who was, immediately before the death, a spouse or common-law partner of the annuitant or to a child or grandchild of the annuitant who was, immediately before the death, financially dependent on the annuitant for support (an “eligible beneficiary”). Paragraph (b) of the definition of refund of premiums in subsection 146(1) was amended by the 1999 Budget to ensure that the application of paragraph (b) is no longer limited to situations where there is no surviving spouse or common-law partner. As a result of that amendment, financially dependent children or grandchildren of the deceased annuitant may receive (or be deemed by subsection 146(8.1) to have received) a refund of premiums even if there is a surviving spouse or common-law partner.
Subsection 146(1.1) goes on to provide that, for the purposes of paragraph (b) of the definition of refund of premiums in subsection 146(1), it is assumed, unless the contrary is established, that an individual’s child or grandchild was not financially dependent on the individual for support immediately before the individual’s death if the income of the child or grandchild for the taxation year preceding the taxation year in which the individual died is greater than the basic personal credit. That limit is increased where the child or grandchild has a physical or mental infirmity.
It is important to note that subsection 146(1.1) does not establish a presumption that a child or grandchild is financially dependent on an individual where his or her income is below the limit specified in that subsection. That question is one of fact, and even if the child's or grandchild's income is below the limit in subsection 146(1.1), it must be established on the facts whether the child or grandchild was financially dependent on the individual immediately before the individual’s death. Facts to take into account include the income from all sources, the cost of living for the child or grandchild, their ability to support themselves, and help from others. If at the time of the annuitant's death, the child or grandchild lives with another person who supports him or her, he or she is generally not considered financially dependent on the annuitant.
In the context of administering an estate, it is the executor’s responsibility to determine, on the facts, whether a child or grandchild was financially dependent on the deceased annuitant. The executor must have sufficient evidence to justify the executor’s decision. If, based on all the facts at the executor’s disposal, the executor is unable to determine whether the child or grandchild was financially dependent, the executor may contact the Tax Services Office of the executor’s region to obtain assistance in determining the tax consequences of a past situation.
In order for an amount to be considered a refund of premiums within the meaning of subsection 146(1), a second condition requires the amount to be paid under the RRSP as a consequence of the death of the annuitant under the plan. Where a person is named a RRSP beneficiary under a RRSP contract, the CRA considers that the amount received is paid under a RRSP as a consequence of the death of the annuitant. If that person is an eligible beneficiary, the amount can be considered as a refund of premiums without any other formality. However, where an amount from the RRSP of a deceased annuitant is paid to the estate of the deceased annuitant and an eligible beneficiary is the beneficiary of the estate, that person did not receive the amounts under the deceased annuitant’s RRSP as a consequence of the death of the annuitant. That situation does not meet the definition of refund of premiums within the meaning of subsection 146(1).
In such a situation, subsection 146(8.1) permits the beneficiary of the estate to still benefit from the rules relating to the refund of premiums. Under that paragraph, where the two conditions listed below are met, then the amount in question is deemed, to the extent it is so designated jointly by the legal representative and the beneficiary, to be received by the beneficiary as a benefit that is a refund of premiums:
- the amount is paid out of or under an RRSP of a deceased annuitant to the legal representative of the deceased annuitant;
- that amount would have been a refund of premiums if it had been paid under the plan to a beneficiary under the annuitant's estate.
To accomplish this, the beneficiary and the legal representative must jointly designate that amount as a refund of premiums by filing Form T2019 Death of an RRSP Annuitant - Refund of Premiums. (footnote 1)
As previously stated, an amount that qualifies as a refund of premiums may reduce the deemed benefit received by the deceased annuitant under subsection 146(8.8). Any amount so deducted within the limitations under subsection 146 (8.9) will not be includible in the deceased annuitant's income because it will not be a "benefit" under subsection 146(1) to the annuitant. However, that amount will be a benefit to the eligible beneficiary who will receive it (or will be deemed to have received it) and such beneficiary must include it in computing income pursuant to subsection 146(8) and paragraph 56(1)(h). Since it is the beneficiary who must include those amounts in computing income, it is that beneficiary who is responsible for paying the tax relating to that inclusion.
However, where the conditions of paragraph 60(l) are satisfied, the refund of premiums included in computing the eligible beneficiary’s income pursuant to subsection 146(8) and paragraph 56(1)(h) may be deducted from that beneficiary’s income.
As specified in paragraph (a) of the definition of "benefit" in subsection 146(1), any amount received out of or under an RRSP by a person other than the annuitant is not a benefit to that person if it can reasonably be regarded as having been included in computing the income of an annuitant by virtue of subsections 146(8.8) and 146(8.9). Consequently, that amount is not taxable to the person who receives it. Where that is the case, it does not matter whether the amount is a refund of premiums. Indeed, the taxable nature of a refund of premiums received by an RRSP beneficiary is related to the choice of the deceased annuitant’s legal representative as to whether to reduce the benefit deemed to be received by virtue of subsection 146(8.8) to the extent permitted by paragraph 146(8.9). The tax on an amount included in computing the deceased's income is therefore a debt of the deceased for the year of death.
In that latter situation, although the tax payable is a debt of the deceased annuitant for the year of death, the RRSP beneficiary may have to pay the tax. Subsection 160.2(1) provides that where the annuitant dies, the person (including the estate of the deceased) who receives an amount out of or under an RRSP is solidarily liable with the deceased annuitant for the payment of a portion the additional tax that is owed because of the addition of that amount to the recipient’s income as required by subsection 146(8.8). For more information on this topic, see Interpretation Bulletin IT-500 Registered Retirement Savings Plan - Death of Annuitant. (footnote 2)
Information Returns
Section 214 of the Regulations sets out the situations in which a person must file an information return (including the T4RSP slip) in an RRSP context. Where a RRSP beneficiary is determined by an RRSP contract, the deceased's legal representative is not required to issue a T4RSP slip to the RRSP beneficiary if the beneficiary takes the deduction under subsection 146(8.9).
Trust for the purposes of the Act
The definition of "trust" in subsection 104(1) does not establish the circumstances in which an entity will be treated as a trust for the purposes of the Act. That definition establishes at most that a trust for the purposes of the Act is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property. In addition, the jurisprudence indicates that the validity of a trust is a question of law.
In our view, where amounts are paid to a minor who must be represented by a guardian in the exercise of the minor’s civil rights, that exercise of guardianship does not, in itself, constitute a trust for the purposes of the Act if that exercise is not a trust under the civil law.
We hope that our comments will be of assistance.
Best regards,
Louise J. Roy C.G.A.
Manager of the Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Available on the CRA's Web site at: http://www.cra-arc.gc.ca/E/pbg/tf/t2019/READ-ME.html
2 Available on the CRA's Web site at http://www.cra-arc.gc.ca/E/pub/tp/it500r/it500r-e.pdf.