Principal Issues: (1) Whether the increase in the FMV of all the property of an unmatured RRSP which accumulated after the date of death of the annuitant and designated as a refund of premiums under subsection 146(8.1) must be reported in the Estate T3 return and whether a T3 slip in respect of this amount must be filed? (2) Whether the result would be the same in the case of a designation pursuant to paragraph (a) of the definition of designated benefit in subsection 146.3(1) that result in the application of subsection 143.3(6.1)?
Position: (1) No. (2) Yes.
Reasons: (1)When an amount is designated pursuant to subsection 146(8.1), the amount so designated is deemed to be received by the individual and not by the legal representative at the time it was paid to the legal representative. Accordingly, the increase in the FMV of the RRSP property after the death that is a refund of premium pursuant to subsection 146(8.1) would not have to be included in the Estate’s income. Where at the time of filing the Estate’s T3 return, the election under subsection 146(8.1) has been made, the increase in the FMV of the RRSP property after the date of death would not have to be reported in the Estate’s T3 return. (2) The rules applicable to the RRIF are similar to the RRSP rules.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 11 OCTOBER 2019
2019 APFF CONFERENCE
Question 12
Registered Retirement Savings Plan on Death - Partial Voluntary Taxation of a Deceased Person
Mr. X died on January 30, 2018. His will bequeathed all of his assets to his spouse, Ms. Y.
Mr. X held inter alia a registered retirement savings plan ("RRSP") with a fair market value ("FMV") at the date of death of $250,000.
Since Mr. X had little in the way of income to include on his final tax return for the year of death, the executor wishes to have the deceased taxed on a portion of the RRSP ($50,000), rather than effecting a "full rollover" of the RRSP to the surviving spouse.
On July 1, 2018, the executor of the estate instructed the financial institution to distribute all of the RRSP assets to an account in the name of the estate. At the time of the distribution to the estate's account, the FMV of the RRSP property was $255,000.
On December 15, 2018, the executor paid $205,000 to the surviving spouse, Ms. Y. On the same day, Ms. Y contributed the $205,000 to her own RRSP.
The financial institution has issued the following tax documents:
- a T4RSP slip (footnote 1) in the name of the deceased, Mr. X, in the amount of $250,000 representing the FMV of all the RRSP property at the date of death (Box 34, Amounts deemed received on death);
- a T4RSP slip in the name of the estate in the amount of $5,000 representing the increase in the FMV of the RRSP property from the date of death to the date of distribution of all the RRSP property to the estate's account (Box 28, Other income or deductions);
- an RRSP contribution receipt in the name of the surviving spouse, Ms. Y, in the amount of $205,000.
The executor of the estate and the surviving spouse, Ms. Y, will jointly designate on Form T2019 (footnote 2) an amount of $205,000 as a refund of premiums so that Mr. X will be taxed on his final tax return for the year of death 2018 on an amount of $50,000 on line 129.
As for Ms. Y, she will attach Form T2019 and the RRSP contribution receipt to her tax return for the 2018 tax year and will include an amount of $205,000 on line 129 and claim a deduction of the same amount on line 232.
Since a T4RSP slip was issued in the estate's name for $5,000, the executor of the estate should normally file a T3 (footnote 3) return and since the $5,000 was paid to the surviving spouse, Ms. Y, she should receive a T3 (footnote 4) from the estate for the same amount.
Questions to the CRA
(a) Subsection 146(8.1) provides that an amount out of or under an RRSP of a deceased person paid to the legal representative at a particular time is deemed to have been received by the eligible beneficiary where an election for a refund of premiums has been filed (Form T2019). Given this deeming rule, is the income of $5,000 still required to be reported on a T3 return for the estate and on a T3 Slip showing the allocation of the amount to the eligible beneficiary?
(b) With the required adjustments, would the conclusion be the same for a registered retirement income fund ("RRIF") pursuant to subsection 146.3(6.1) and the definition of "designated benefit" in subsection 146.3(1)?
CRA Response to Question 12(a)
By virtue of subsection 146(8.1), where a deceased annuitant's RRSP amount is paid to the deceased's legal representative, and that amount would have been a refund of premiums if it had been paid to the beneficiary of the estate, that amount is deemed, to the extent it is so designated jointly by the legal representative and the individual in Form T2019, to be received by the beneficiary at the time it was so paid as a benefit that is a refund of premiums.
A "refund of premiums" within the meaning of subsection 146(1) includes inter alia any amount paid to the annuitant's spouse or common-law partner out of or under an RRSP where the annuitant died before the maturity of the plan and the amount is paid as a consequence of the death of the annuitant under the plan, other than a tax-paid amount in respect of the plan. The increase in the FMV of RRSP property determined after the date of death to December 31 of the taxation year following the death of the annuitant is generally not a "tax-paid amount" as defined in subsection 146(1) and could be a refund of premiums.
In the situation described, the sum of $205,000 jointly designated by the legal representative and the spouse, Ms. Y, on Form T2019 would be deemed to have been received by Ms. Y (and not by the legal representative) in respect of a benefit that is a refund of premiums. That amount should be included in computing Ms. Y's income for the 2018 taxation year under subsection 146(8) and paragraph 56(1)(h), being the taxation year in which the benefit is deemed to have been received by Ms. Y.
Where at the time of filing the T3 Trust Income Tax and Information Return, the election under subsection 146(8.1) has been made, the increase in the FMV of the RRSP property determined after the date of death that is a refund of premiums would not have to be reported in the T3 return of the estate.
CRA Response to Question 12(b)
The rules applicable to RRIFs are similar to those for RRSPs. Where a legal representative of the deceased last annuitant of a RRIF receives a designated benefit, subsection 146.3(6.1) provides that the designated benefit is deemed to be received by the individual out of or under the fund at the time it is received by the legal representative and not to be received out of or under the fund by any other person.
Paragraph (a) of the definition "designated benefit" in subsection 146.3(1) provides that amounts paid out of or under a RRIF after the death of the last annuitant to the legal representative of that annuitant may be jointly designated on a Form T1090 filed with the Minister by the legal representative and the individual where the amounts paid were a "refund of premiums" as defined in subsection 146(1) and they were paid to the individual out of or under the RRIF and if the RRIF had not matured before the death.
Consequently, the amount that is jointly designated as a designated benefit should be reported by the individual on the individual’s income tax return in the year the payment was received by the legal representative, pursuant to subsection 146.3(5) and (6.1) and paragraph 56(1)(t).
In a situation where, at the time of filing the T3 estate return, an election under the definition of "designated benefit" in subsection 146.3(1) has been made, the increase in the FMV of the RRIF property determined after the date of death that is a designated benefit would not have to be reported in the T3 estate return.
Nathalie Boyer
(450) 926-7039
October 11, 2019
2019-081518
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Statement T4RSP, « T4RSP Statement of RRSP Income ».
2 CANADA REVENUE AGENCY, Form T2019, « Death of an RRSP Annuitant - Refund of Premiums ».
3 CANADA REVENUE AGENCY, Form T3 RET, « Trust Income Tax and Information Return » (« T3 Return »).
4 CANADA REVENUE AGENCY, T3 Slip, « Statement of Trust Income Allocations and Designations (slip) ».
5 CANADA REVENUE AGENCY, Form T1090, « Death of a RRIF Annuitant - Designated Benefit or Joint Designation on the Death of a PRPP Member ».
6 The individual is, among other things, the individual who, immediately before the death of the last annuitant, was the spouse or common-law partner of the annuitant.