Principal Issues: 1) Whether an amount can qualify as a "designated benefit" under paragraph (a) of the definition in subsection 146.3(1) where the surviving spouse dies before the amount is paid out of or under the RRIF to the deceased last annuitant's legal representative?
2) Whether an amount can qualify as a "designated benefit" under paragraph (b) of the definition in subsection 146.3(1) where the surviving spouse dies before the amount is paid out of or under the RRIF to him/her?
3) Where the surviving spouse of the RRIF's last annuitant is entitled under the last annuitant's will to receive amounts held under the RRIF, but dies before any amounts are paid out of or under the RRIF, is it possible that such amounts be included in the income of the spouse's estate instead of in the income of the last annuitant?
Position: 1), 2) and 3) No.
Reasons: 1) and 2) Wording of the definition of "designated benefit" in subsection 146.3(1). 3) The spouse's estate cannot receive or be deemed to have received a designated benefit. Because no amount qualifies as a "designated benefit", the full FMV of the RRIF's property is to be included in the last annuitant's income pursuant to subsections 146.3(5) and (6), without any possible reduction under subsection 146.3(6.2).
Financial Strategies and Financial Instruments Roundtable, 6 October 2017
2017 APFF Conference
Question 6
RRIF transfer at death - successive deaths
The Income Tax Act provides that on the death of the last annuitant of a registered retirement income fund ("RRIF"), the fair market value ("FMV") of the RRIF property immediately before death must be included in the deceased's income (subsections 146.3(5) and (6) and paragraph 56(1)(t)). Where the conditions of the definition of "designated benefit" are met, particularly where an "Eligible Recipient" (footnote 1) is the beneficiary of the RRIF, whether by virtue of contract or under a valid beneficiary designation made by will, it is possible to transfer an amount from the RRIF to the Eligible Recipient in such a way that the legal representative of the deceased does not have to include this amount in the taxable income of the deceased when the T1 final return is filed. This amount must be included in the return of the Eligible Recipient. To the extent that the Eligible Recipient contributes an equivalent amount (to the extent permitted by the Income Tax Act) as a premium under a registered retirement savings plan ("RRSP") or as consideration for an RRIF, in particular, as permitted by paragraph 60(1), and the other conditions of that paragraph are met, the Eligible Recipient may be entitled to an equivalent deduction, so that the transfer of amounts from the RRIF of the deceased annuitant can be made without immediate tax impact.
Settlement of an estate is often a lengthy and time-consuming process, and it is common, especially in the case of senior couples, that the surviving spouse dies before all stages for the settling of the estate of the first to die are completed and the distribution of the property is completed.
In Quebec, because of the inability to name a designated beneficiary in most RRSPs and RRIFs, the transfer of RRIF property in the form of a designated benefit is often the subject of a specific bequest that spouses mutually make in their respective wills, dependent on the one who inherits from the other, to pay the taxes due on this bequest.
Imagine the following factual situation.
Mr. A and Mrs. B had been married for more than 50 years. Mr. A died on May 12, 2015, leaving a will by which he provided a particular legacy of the RRIF of which he was the annuitant to his wife, contingent on the latter to assuming the taxes. In addition, he created an exclusive trust in favor of his wife, which he as designated his universal legatee to receive the residue of his property.
Before the estate of Mr. A was settled, and before the amounts held under the RRIF of Mr. A was paid to Mrs. B or the executor of the estate of Mr. A, Mrs. B in turn died on October 28 2015, leaving a will by which she bequeathed all the property she owns at the time of her death to the children of her marriage to Mr. A.
According to the Civil Code of Québec, a succession opens on the death of a person (CCQ article 613). All the property of the deceased constitutes a single patrimony and is vested according to the will (CCQ article 614). An heir is a natural person who exists at the opening of the succession (CCQ article 617). A legatee by particular title who accepts the legacy is not an heir, but is nonetheless seized of the property bequeathed, as is an heir, by the death of the deceased or by the event which gives effect to the legacy (CCQ article 739).
In this case, the bequest was conditional upon Mrs. B assuming the payment of taxes owed on the RRIF.
As at the time of Mrs. B's death, the amounts held under Mr. A's RRIF were still be held by the RRIF's issuer, and we have questions as to the application of the definition of "designated benefit" in the circumstances. In Technical Interpretation 2015-0592681E5 (footnote 2), the CRA indicated that for an amount to be considered a "designated benefit" under paragraph (a) of the definition of that term in subsection 146.3(1), the amounts paid under the RRIF after the death of its last annuitant to the legal representative of the RRIF must, among other conditions, be designated jointly, by the legal representative and the individual in prescribed form filed with the Minister. The CRA added that the individual is the Eligible Recipient under this condition, and that for that designation to be valid, the Eligible Recipient must be alive when the joint designation is made.
Questions to the CRA
(a) At the time of the death of Mr. A and the opening of his succession, Mrs. B was alive and qualified as an Eligible Recipient, being the surviving spouse of Mr. A (paragraph (a) of the definition of "refund of premiums" subsection 146(1)). As such, would it be correct to say that she was deemed to have received a designated benefit at the time the deceased annuitant's legal representative receives it (subsection 146.3(6.1))?
(b) As the sole legatee, do the amounts of the particular legacy paid to the legal representative of Mrs. B’s estate by the estate of Mr. A. qualify as “designated benefits” under para. (b) of the definition in s. 146.3(1)?
(c) Can the estate of Mrs. B receive the RRIF amounts payable to Mrs. B. notwithstanding her death and pay the tax on those amounts?
(d) If this solution is acceptable, what Form can be used to permit the transfer of those amounts free of tax from the estate of Mr. A to that of Mrs. B?
CRA response to Qestion 6(a)
The mere fact that Mrs. B was the surviving spouse of Mr. A at the time of his death is not sufficient to cause Mrs. B to be deemed, pursuant to subsection 146.3(6.1), to have received a designated benefit at the time the deceased annuitant's legal representative receives amounts from Mr. A's RRIF.
In particular, for subsection 146.3(6.1) to apply, the legal representative of the deceased annuitant must receive an amount that qualifies as a designated benefit for the purposes of that provision. The term "designated benefit" is defined in subsection 146.3(1). According to this definition, two types of amounts may be a designated benefit.
The first type of amount is referred to in paragraph (a) of the definition "designated benefit" in subsection 146.3(1) and corresponds to the amounts paid out of or under an RRIF, after the death of the last annuitant, to the legal representative of that annuitant and that meets certain conditions.
The second type of amounts qualifying as a designated benefit is referred to in paragraph (b) of that definition. Under this paragraph, a designated benefit refers to amounts, paid out of or under an RRIF after the death of the last annuitant thereunder to an individual who is an Eligible Recipient, that would be refunds of premiums had the fund been an RRSP that had not matured before the death. In this situation, the amounts are not paid to the legal representative of the deceased annuitant, but directly to the Eligible Recipient. Subsection 146.3(6.1) has no application in this case since the legal representative receives nothing out of the RRIF of the deceased last annuitant.
Thus, for Mrs. B to be deemed, pursuant to subsection 146.3(6.1), to have received a designated benefit at the time Mr. A's legal representative receives amounts from Mr. A's RRIF, the amounts received by Mr. A's legal representative must meet the conditions set out in paragraph (a) of the definition of "designated benefit" in subsection 146.3(1). These conditions are as follows:
(i) the amounts would be "refunds of premiums" as that term is defined in subsection 146(1), on the assumptions that the amounts were paid to the individual under the RRIF and that the RRIF was an RRSP that had not matured before the death of the annuitant; and
(ii) they are designated jointly by Mr. A’s legal representative and the individual on the prescribed form filed with the Minister.
In the situation you describe, since Mrs. B died before amounts were paid under the RRIF to the legal representative of the deceased last annuitant, the CRA is of the view that the conditions of paragraph (a) cannot be satisfied.
CRA response to Question 6(b)
As previously noted, paragraph (b) of the designated benefit definition refers to amounts paid directly from the RRIF to the individual who is an Eligible Recipient. In this situation, the amounts are not paid to the legal representative of the deceased annuitant, but directly to the Eligible Recipient. The amounts referred to in paragraph (b) of the definition are generally those that are paid directly under the RRIF to the Eligible Recipient who is named as an RRIF beneficiary under the RRIF contract or by virtue of a valid beneficiary designation in the will of the last annuitant.
Where, as you suggest in your question, such a beneficiary designation is not legally possible, and an amount from the RRIF of the deceased last annuitant is paid to the estate of the deceased and an Eligible Recipient is a beneficiary of the estate (as legatee or heir), the amount is not paid to the Eligible Recipient "out of or under the fund" and this situation does not comply with paragraph (b) of the definition "designated benefit" in paragraph 146.3(1).
In any event, even in the situation where amounts could have been paid under the RRIF directly to the Eligible Recipient, where the Eligible Recipient died before the amounts had been paid to him or her, the CRA is of the view that conditions for the application of paragraph (b) of the definition cannot be met.
CRA response to Questions 6(c) and (d)
Under subsection 146.3(6), where the last annuitant under an RRIF dies, that annuitant is deemed to have received, immediately before death, an amount out of or under an RRIF equal to the FMV of the property of the RRIF at the time of the death. Consequently, in the year of death, this amount must be included in computing the income of the deceased annuitant under subsection 146.3(5) and paragraph 56(1)(t). Only where an amount qualifies as a "designated benefit" within the meaning of subsection 146.3(1) can an amount be deducted from the amount deemed to be received by the deceased last annuitant, in accordance with subsection 146.3(6.2). In such a case, an amount equal to the deduction must then be included in computing the income of the Eligible Recipient who has received the designated benefit or is deemed to have received it in accordance with subsection 146.3(5), or subsections 146.3(5) and (6.1), as the case may be, and paragraph 56(1)(t).
In the situation you describe, the amounts from Mr. A's RRIF that would be received by Mrs. B's estate could not qualify as a "designated benefit" within the meaning of subsection 146.3(1), as noted above. Accordingly, the amount deemed to be received by Mr. A pursuant to subsection 146.3(6) would be equal to the FMV of the RRIF property at the time of death, with no deduction available to reduce this amount.
The amounts included in the computation of Mr. A's income that were subsequently paid out of Mr. A's RRIF to his legal representative would not constitute taxable benefits to the estate of Mr. A, by virtue of paragraph 146.3(5)(a).
Mélanie Beaulieu
(613) 670-8905
October 6, 2017
2017-070779
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The Eligible Recipient is either the individual who, immediately prior to the death of the last annuitant, was the annuitant’s spouse or common-law partner, or the child or grandchild of the last annuitant who, immediately before the annuitant’s death, was financially dependent on the annuitant.
2 CANADA REVENUE AGENCY, Technical Interpretation 2015-0592681E5, July 11, 2016.