Principal Issues: 1) Does subsection 146.3(14) permit a tax free transfer from an individual's RRIF to his/her spouse’s RRSP or RRIF, from whom the individual was separated but not divorced, in settlement of rights arising out of their marriage, where the individual dies before the transfer is made?
2) In such a situation, could the deceased annuitant's legal representative and the spouse jointly elect that the amounts paid out of the RRIF to the legal representative qualified as a "designated benefit"?
3) If so, could the rollover treatment apply to the designated benefit?
Position: 1) No. 2) Yes. 3) Possibly, up to the eligible amount, if the spouse contributes an equal amount to an RRSP, a RRIF, a PRPP or to acquire a qualifying annuity of which she would be the annuitant.
Reasons: 1) Subsection 146.3(14) does not apply after the death of the transferor annuitant.
2) Had the amounts being paid directly out of the RRIF to the spouse, and had the RRIF been an unmatured RRSP, the amounts would have been a refund of premiums because they would have been paid as a consequence of the death of the annuitant, considering paragraph 248(23.1)(a). It follows that the amounts would meet subparagraph (a)(i) of the definition of "designated benefit" in subsection 146.3(1).
3) Wording of subsections 146.3(6), (6.1), (6.11), (6.2) and paragraph 60(l).
Financial Strategies and Financial Instruments Roundtable, 6 October 2017
2017 APFF Conference
Question 5
RRIF transfers at death– partition of family patrimony
The Income Tax Act provides that at 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)). The financial institution must then issue a T4RIF slip (footnote 1) in the name of the deceased. Where certain conditions are met, it is possible to transfer the RRIF "designated benefit" tax-free to a surviving spouse where the surviving spouse is a beneficiary or heir under the will and pays an equivalent amount (within the limits permitted by the Income Tax Act), such as a premium under a registered retirement savings plan ("RRSP") or in consideration for a RRIF, in accordance with the provisions of paragraph 60(l).
On the other hand, the Civil Code of Québec ("CCQ") provides that the family patrimony includes the benefits accrued during the marriage under a retirement savings plan such as an RRSP or an RRIF (CCQ article 415). The partition of assets may be requested by a spouse upon the dissolution of the marriage, which occurs at the time of separation from bed and board, divorce or the death of one of the spouses (CCQ article 416).
It often happens that a married couple separates amicably without otherwise undertaking legal proceedings on separation or divorce as in the following situation.
A couple in fact separated in 2010 without proceeding with a formal division of the assets accumulated during the marriage, including the value of the family patrimony which the spouses had not otherwise renounced. The husband died a few years later by leaving a will in which he named his children, born of his marriage with his wife, as the heirs of all his property. The surviving wife, being completely excluded from the estate, approached the executor and requested a partition of the family patrimony, including the proceeds of the Monsieur’s RRIF. According to CCQ article 419 CCQ., it is possible to effect the partition of a family patrimony by giving in payment or by payment in money. The executor and the surviving spouse agreed to transfer the RRIF assets of which the annuitant was the surviving spouse on a tax-free basis for the deceased, all by a written family patrimony agreement, prepared by the notary and signed by the executor and the surviving spouse, as required by subsection 146.3(14).
The financial institution of the gentleman where the RRIF was deposited refused to sign the form T2220 (footnote 2) prepared by the executor and to transfer the balance of the amounts in the RRIF of Monsieur to the RRIF account of Madam at the same financial institution, on the basis that the annuitant of the RRIF had died and that the wife was not an heir under the will.
The instructions in Form T2220 read as follows:
If you are the […] carrier of a RRIF[…], you should use this form to directly transfer all or part of the property of an annuitant’s[…] RRIF […] to the annuitant’s […] former spouse’s or common-law partner’s […] RRIF… . The transfer must be under a decree, order, or judgment of a competent tribunal, or a written separation agreement, relating to a division of property in settlement of rights arising out of, or on the breakdown of, the annuitant's marriage or common-law partnership.
The CRA has already ruled on related issues in the following technical interpretations:
- 2003-0039621E5 (footnote 3), Claim against the estate
- 2005-0126621R3 (footnote 4), Claim against the estate
- 2006-0201371E5 (footnote 5), Legacy to an exclusive spousal trust
Questions to the CRA
(a) Would Form T2220 be appropriate in the circumstances for effecting the transfer of the RRIF, given the death of the original annuitant and the agreement to settle the rights arising from the marriage, which would have ended with the death of Monsieur?
(b) In the situation described above, is the executor of the estate of the deceased, who is his legal representative within the meaning of the Civil Code of Québec and who came into legal possession of the property of the RRIF, authorized to sign form T2220 in the place of the deceased?
(c) If not, in the circumstances described above, and as a consequence of the annuitant's death, can the amounts from the RRIF be designated as a "designated benefit" within the meaning of subsection 146.3(1) and transferred to the surviving spouse if the latter and the legal representative of the deceased jointly designate it on Form T1090 (footnote 6) as provided for in subparagraph (a)(ii) of that definition?
(d) Is there an income inclusion and contribution exclusion pursuant to the statement of designated benefits in these circumstances?
CRA response to Questions 5(a) and 5(b)
Form T2220 is the appropriate form in the case of the application of subsection 146.3(14) and other provisions permitting the direct transfer of amounts between certain registered plans in the event of the breakdown of the marriage or common-law partnership [“union de fait”]. Subsection 146.3(14) permits the transfer of property held in the RRIF of an annuitant by the issuer of the RRIF directly to certain registered plans, such as an RRSP or RRIF, whose annuitant is such annuitant's spouse. For this purpose, the payment or transfer must be made under an order or judgment of a court of competent jurisdiction or under a written agreement relating to the division of property between the annuitant and the spouse, in settlement of the rights arising out of, or on the break-down, of their marriage. The CRA is of the view that subsection 146.3(14) does not apply where one of the spouses has died. Where, as in the situation described, the last annuitant of the transferor RRIF is deceased, the RRIF no longer has an annuitant within the meaning of subsection 146.3(1), so that a transfer of property from the RRIF of an annuitant is no longer possible. In any event, subject to the rules relating to a designated benefit under subsection 146.3(6), the last annuitant is deemed to have received, immediately before death, an amount out of or under the RRIF equal to the FMV of the property of the RRIF at the time of the annuitant’s death. Even if subsection 146.3(14) were applicable after the death of the last RRIF annuitant, it would not have the effect of rendering subsection 146.3(6) inapplicable immediately before the death of the last annuitant. This confirms in our view that subsection 146.3(14) cannot be applied after the death of the last RRIF annuitant. Since subsection 146.3 (14) does not apply in the situation described, Form T2220 would not be appropriate in this situation.
CRA response to Question 5(c)
Under paragraph (a) of the definition of "designated benefit" in subsection 146.3(1), amounts paid under an RRIF after the death of the last annuitant to the legal representative of that annuitant may be designated jointly by the legal representative and an individual where the amounts paid would have been "refunds of premiums" within the meaning of subsection 146(1) had they been paid under the RRIF to the individual and the RRIF had been an RRSP that had not matured before the annuitant's death.
Under the definition of "refund of premiums" in subsection 146(1), where the annuitant of an RRSP died before the maturity of the plan, any amount paid out of or under the RRSP as a consequence of the death of the annuitant (other than a tax-paid amount in respect of the RRSP) to an individual who was, immediately before the death, a spouse of the annuitant, is a refund of premiums.
Under paragraph 248(23.1)(a), where a property is, after the death of a taxpayer, transferred or distributed to a person who was the taxpayer’s spouse or common-law partner at the time of the death, or acquired by that person, as a result inter alia of the family law regime relating to the division of assets [“règles concernant le partage du patrimoine familial”], the property is deemed to have been so transferred, distributed or acquired, as the case may be, as a consequence of the death.
As a result, in the situation described, if the amounts were paid directly to the surviving spouse out of a RRIF that would have been an RRSP that had not matured before the death, the amounts would be refunds of premiums.
Consequently, amounts paid out of the RRIF to the legal representative of the deceased annuitant, which the legal representative would like to transfer to the surviving spouse in settlement of her rights in the family patrimony, could qualify as a designated benefit, provided that these amounts are designated jointly by the legal representative and the surviving spouse on Form T1090 filed with the Minister in accordance with subparagraph (a)(ii) of the definition "designated benefit" in subsection 146.3(1).
CRA response to Question 5(d)
Under subsection 146.3(6), where the last annuitant under a RRIF dies, that annuitant shall be deemed to have received, immediately before death, an amount out of or under the RRIF equal to the FMV of all 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). However, subsection 146.3(6.2)permits the reduction under subsection 146.3(6) of the amount deemed to be received by the last deceased annuitant where the amount qualified as a "designated benefit" as defined in subsection 146.3(1).
By virtue of subsection 146.3(6.1), where an amount qualifies as a designated benefit by reason of a joint designation made by the legal representative and the surviving spouse in accordance with subparagraph (a)(ii) of the definition of "designated benefit" in subsection 146.3(1), a designated benefit is deemed to be received by the surviving spouse, and not by any other person, out of or under the RRIF at the time it is received by the legal representative.
Thus, an amount that qualifies as a designated benefit can reduce the deemed benefit received by the last deceased annuitant under subsection 146.3(6). Any amount so deducted within the limits of subsection 146.3(6.2) will not be taxable as the income of the deceased last annuitant. However, this amount will be included in computing the surviving spouse's income in accordance with subsection 146.3(5) and paragraph 56(1)(t).
However, where the conditions of paragraph 60(l) are met, the designated benefit included in computing the surviving spouse's income pursuant to subsection 146.3(5) and paragraph 56(1)(t) can be deducted from his or her income.
In particular, where in a particular taxation year, amounts are included in the computation of the income of the spouse of a deceased last annuitant of an RRIF as a designated benefit under that RRIF, paragraph 60(l) accords the spouse a deduction not exceeding the eligible amount as defined in subsection 146.3(6.11) to the extent that an amount equalling that amount is paid by or on behalf of the spouse in the year or within 60 days after the end of the year:
(i) as a premium under an RRSP under which the spouse is the annuitant;
(ii) to acquire a qualifying annuity that meets certain conditions and under which the spouse is the annuitant; or
(iii) in consideration for an RRIF under which the spouse is the annuitant.
For this purpose, subsection 147.5(11) provides that any contribution made to a pooled registered pension plan ("PRPP") by a member of such a plan is deemed to be a premium paid by the member to an RRSP under which the member is the annuitant.
In summary, the inclusion, under subsection 146.3(5) and paragraph 56(1)(t), of amounts that qualify as a designated benefit, in the income of the spouse of the deceased last annuitant, when combined with the deduction provided under paragraph 60(l), effectively permits a tax-free transfer - subject to the computation of the eligible amount - of amounts that were held under the deceased annuitant's RRIF, a PRPP, a qualifying annuity, or a RRIF under which the spouse is the annuitant.
In the situation described, and subject to the calculation of the eligible amount, the transfer of the designated benefit to the surviving spouse could possibly be tax-free, provided that the surviving spouse pays an amount equal to the eligible amount as a premium under an RRSP, or a PRPP contribution, to acquire a qualifying annuity that meets certain conditions, or in consideration for an RRIF, as the case may be, within the time period provided in paragraph 60(l).Mélanie Beaulieu
(613) 670-8905
October 6, 2017
2017-070780
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, T4RIF SLIP, Statement of Income From a Registered Retirement Income Fund, 2016.
2 CANADA REVENUE AGENCY, form T2220, Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, PRPP or SPP on Breakdown of Marriage or Common-law Partnership, 2016.
3 CANADA REVENUE AGENCY, Technical Interpretation 2003-0039621E5, May 6, 2004.
4 CANADA REVENUE AGENCY, Advance Ruling 2005-0126621R3, January 1, 2005.
5 CANADA REVENUE AGENCY, Technical Interpretation, 2006-0201371E5, November 14, 2006.
6 CANADA REVENUE AGENCY, form T1090, Death of a RRIF Annuitant - Designated Benefit, 2016.
7 In very general terms, the eligible amount ensures that the RRIF minimum amount is properly taxed.