Principal Issues: (1) Will the amounts out of the RRSP of the deceased annuitant's RRSP, paid to the estate then transferred to a testamentary trust for the benefit of a financially dependent adult son, be deemed to be refunds of premiums received by the son? (2) Will the amounts received out of the RRSPs and used by the testamentary trust's trustees to acquire an annuity under which the trust will be the annuitant be deductible under paragraph 60(l)?
Position: (1) and (2) Yes, based on the facts described in the request.
Reasons: (1) The amounts paid to the estate will be jointly designated by the estate executors and the deceased annuitant’s son according to subsection 146(8.1) (form T2019). (2) The son was dependant on the deceased annuitant because of mental infirmity. The testamentary trust to be created will be a lifetime benefit trust for the purposes of subsection 60.011(3). The conditions of paragraph 60(l) will be met.
XXXXXXXXXX 2020-084823
XXXXXXXXXX
Subject: Application for an advance ruling
XXXXXXXXXX Estate
Dear Sir,
This letter is in response to your letter of XXXXXXXXXX, in which you requested advance tax rulings on behalf of the XXXXXXXXXX Estate and XXXXXXXXXX. This letter is also in response to your emails of XXXXXXXXXX and XXXXXXXXXX, in which additional information was provided to us.
Unless otherwise stated:
(i) all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
(ii) all words and phrases referred to in this letter and defined in the Act shall have the meaning given to them in the definition;
(iii) all monetary amounts are in Canadian dollars;
(iv) words importing the singular number shall include the plural and vice versa if the context so requires.
To the best of your knowledge and that of the parties involved in the transactions, none of the proposed transactions or any of the issues raised herein are:
(i) in a previously filed return of the Taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayer or a related person;
(iii) under objection by the Taxpayer or a related person;
(iv) the subject of a current or completed court process involving the Taxpayer or a related person; or
(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayer or a related person.
DESIGNATION OF PARTIES, DEFINITIONS AND ABBREVIATIONS
In this letter, the following abbreviations, expressions and terms have the meanings described below. Similarly, the parties involved in the proposed Transactions (described below) are referred to as follows:
"Annuity" means the life annuity that will be acquired for the Trust's account, as provided for in Section 22 of the Proposed Transactions;
"Beneficiary" means XXXXXXXXXX, son of the late XXXXXXXXXX, who will, during his lifetime, be the sole beneficiary of the XXXXXXXXXX Trust to be established under the will of the late XXXXXXXXXX;
"CRA" means the Canada Revenue Agency;
"Deceased" means the late XXXXXXXXXX;
"Estate" means Estate of the late XXXXXXXXXX, being the estate of the Deceased;
"Executor 1" means XXXXXXXXXX, executor of the late XXXXXXXXXX Estate and nephew of the deceased;
"Executor 2" means XXXXXXXXXX, executor of the late XXXXXXXXXX Estate and nephew of the Deceased;
"Executors" means collectively Executor 1 and Executor 2;
"FMV" means fair market value;
"Minister" means the Minister of National Revenue;
"Mother" means XXXXXXXXXX, mother of the Beneficiary, divorced from the deceased;
"Paragraph" refers to a numbered paragraph herein;
"Proposed Transactions" means the transactions described in Paragraphs 20 to 23 below;
"RRSP 1" means the deceased's registered retirement savings plan, designated by the deceased’s financial institution as account (XXXXXXXXXX RRSP) XXXXXXXXXX;
"RRSP 2" means the deceased's registered retirement savings plan designated by the deceased’s financial institution as the (XXXXXXXXXX LIRA) XXXXXXXXXX account;
"RRSP" means RRSP 1 and RRSP 2 collectively;
"Trust" means the XXXXXXXXXX Trust to be established under the will of the Late XXXXXXXXXX;
"Trustee 1" means XXXXXXXXXX, trustee of the Trust and nephew of the deceased;
"Trustee 2" means XXXXXXXXXX, trustee of the Trust and nephew of the deceased;
"Trustee 3" means XXXXXXXXXX, trustee of the Trust and a friend of the deceased;
"Trustees" means collectively, Trustee 1, Trustee 2 and Trustee 3;
"Will" means the will and testament of the Deceased, notarized before XXXXXXXXXX, notary public in XXXXXXXXXX, dated XXXXXXXXXX.
FACTS
1. The deceased died on XXXXXXXXXX, at the age of XXXXXXXXXX.
2. Beneficiary was born on XXXXXXXXXX and is XXXXXXXXXX years old. He is the son of the deceased.
3. A medical certificate as to Beneficiary's state of health, dated XXXXXXXXXX, was issued by his doctor, a psychiatrist at the XXXXXXXXXX hospital, which states that Beneficiary suffers from XXXXXXXXXX and XXXXXXXXXX.
4. The Beneficiary's doctor has certified that the Beneficiary is unable to work and support himself due to all his "psychiatric/psychotic conditions and illnesses". XXXXXXXXXX
5. The Régie des rentes du Québec (now Retraite Québec) has recognized and acknowledges that the Beneficiary is disabled, according to the terminology used in the applicable statutes and regulations in Quebec, XXXXXXXXXX.
6. Because of his mental disability, within the meaning of the law applicable to the Quebec Pension Plan, the Beneficiary receives a monthly disability pension from the Régie des rentes du Québec. In XXXXXXXXXX, that monthly pension amounted to XXXXXXXXXX.
7. The taxable income reported by the Beneficiary for his XXXXXXXXXX taxation year was $XXXXXXXXXX. His income for the XXXXXXXXXX taxation year is estimated to be $XXXXXXXXXX.
8. Since XXXXXXXXXX, the Beneficiary has resided alone in a modest apartment, the rent for which amounts to $XXXXXXXXXX per XXXXXXXXXX, located in XXXXXXXXXX of the area where the Deceased resided before his death.
9. Because of his inability to hold a full-time job and to provide for all his needs himself, the Beneficiary has always benefited from the support of the deceased in order to provide for his needs, since he is not able to meet them himself.
10. XXXXXXXXXX.
11. Mother also supported the Beneficiary, but to a lesser extent than the deceased.
12. At the time of his death, the Deceased was the annuitant of RRSPs. At that time, the FMV of RRSP 1 was valued at approximately $XXXXXXXXXX and the FMV of RRSP 2 was valued at approximately $XXXXXXXXXX.
13. The Will of the Deceased, dated XXXXXXXXXX, provides that Executor 1 and Executor 2 will act as executors of the Estate.
14. Under the terms of the Will, the Deceased provided for the creation of a Trust, being a testamentary trust for the benefit of the Beneficiary, and made a specific bequest to the Trust of all of the Deceased's rights, titles and interest in the RRSPs, provided that the Trust qualified as a "lifetime benefit trust" in accordance with section 60.011(1). Failing that, the Will provided that the specific bequest of all of the Deceased's rights, titles and interests in the RRSPs to the Trust was deemed to be void and a bequest of the rights, titles and interests in the RRSPs was made to the beneficiary of the residue of the Estate, being another testamentary trust created for the sole benefit of the Beneficiary.
15. It is intended that the Trustees of the Trust will be Trustee 1, Trustee 2 and Trustee 3.
16. Under the terms of the Will, the Beneficiary will, during his lifetime, be the sole beneficiary of the Trust. Such terms provide that no person, other than the Beneficiary, shall before his death receive any part of the income or capital of the Trust or otherwise obtain the use thereof.
17. The Will provides that the Trust shall terminate on the earlier of the following:
(a) after the distribution of all the Trust Property where payment of the annuity shall have ceased and all the capital held in trust shall have been distributed to the Beneficiary.
(b) upon the death of the Beneficiary; any amount payable under the annuity whose term was guaranteed and any balance in the Trust's trust estate, if any, shall in that event vest in the persons and in the manner described in the Will.
18. The Will also provides that the Trustees shall have the power and discretion, within the limits set out in the definition of "lifetime benefit trust" in section 60.011(1), to provide the Beneficiary with such income or capital as may be necessary to pay for goods or services as may be required for his needs. Any unallocated income in a particular year will be capitalized in the Trust.
19. The Deceased, Beneficiary, and the Trustees are residents of Canada for the purposes of the Act.
PROPOSED TRANSACTIONS
20. Prior to XXXXXXXXXX, the Executors will request that the RRSPs be wound up and will transfer all RRSP monies to the Trust to be established pursuant to Article XXXXXXXXXX of the Will.
21. The Executors and Beneficiary will file with the Minister (together with the deceased's original or amended final return and the Beneficiary's income tax return for the XXXXXXXXXX taxation year, as the case may be), in respect of each of the RRSPs, a joint designation in respect of the RRSP amounts, in the prescribed form (T2019), under subsection 146(8.1), so that all amounts paid by the RRSPs to the Executors, pursuant to the Proposed Transaction described in paragraph 20 above, are deemed to have been received by the Beneficiary (and not by the Executors) on account of a benefit that is a refund of premiums.
22. Within the time periods set out in the preamble to paragraph 60(l), the Trustees will, on behalf of the Trust, acquire, from a person licensed or otherwise authorized by federal or provincial law to carry on an annuities business in Canada, a life annuity that, during the lifetime of the Beneficiary, will not provide for any payments other than payments to be made periodically at intervals not exceeding one year, and will have, inter alia, the following characteristics, so that it satisfies the conditions set out in paragraph 60.011(2)(a):
(a) its sole annuitant will be the Trust;
(b) it will be a simple life annuity with or without a guaranteed period or an annuity of a fixed term equal to the difference between 90 years of age and the Beneficiary's age in whole years at the time of purchase of the annuity; and
(c) its terms will require that, in the event of the death of the Beneficiary during the guaranteed period or fixed term, any amounts that would otherwise be payable after such death will be commuted into a single payment.
If it is a life annuity with a guaranteed period, that guaranteed period will be equal to or less than the difference between 90 years of age and the Beneficiary's age in whole years at the time of purchase of the annuity.
23. The Beneficiary will elect, in the Beneficiary's return of income under Part I of the Act for the year XXXXXXXXXX, to have subparagraph 60.011(3)(b)(ii) apply to the amount paid to acquire the annuity.
PURPOSES OF THE PROPOSED TRANSATIONS
The purpose of the joint designation described in paragraph 21 above is to allow the amounts to be paid to the Executors out of or under the RRSPs, as provided in paragraph 20 above, to be deemed to be received by the Beneficiary (and not by the Executors) as benefits that are refunds of premiums, so as to allow the Executors to deduct, in the final return of the deceased pursuant to subsection 146(8.9), an amount out of the amount deemed to have been received by the Deceased pursuant to subsection 146(8.8). The purpose of the acquisition of the annuity described in paragraph 22 and the election described in paragraph 23 above is to allow the Beneficiary to claim the deduction provided for in paragraph 60(l) in respect of the benefits that he will be deemed to have received as refunds of premiums.
ADDITIONAL INFORMATION
The main contact details for the taxpayers covered by the advance rulings are XXXXXXXXXX
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. The amounts designated jointly for each of the RRSPs by the Executors and the Beneficiary in accordance with Paragraph 21 of the Proposed Transactions will be deemed to be received by the Beneficiary (and not the Executors) in the XXXXXXXXXX taxation year as benefits that are refunds of premiums in accordance with subsection 146(8.1) and will be included in computing the Beneficiary's income for the XXXXXXXXXX taxation year pursuant to subsection 146(8) and paragraph 56(1)(h).
B. Amounts so deemed to be received by the Beneficiary in the XXXXXXXXXX taxation year as benefits that are refunds of premiums may be deducted, to the extent permitted by subsection 146(8.9), from amounts deemed to have been received by the deceased in respect of RRSPs in the XXXXXXXXXX year under subsection 146(8.8). The Executors may request a reassessment of the final return of the deceased if necessary to take these deductions into account.
C. The amount paid by the Trustees to acquire the annuity will be deductible by the Beneficiary in the Beneficiary's return for the XXXXXXXXXX taxation year, to the extent permitted by paragraph 60(l), taking into account the provisions of subsection 60.011(3).
D. During the lifetime of the Beneficiary, each payment received under the Annuity by the Trust will be included in the income of the Beneficiary for the year in which the payment is made and will not be included in the income of the Trust, pursuant to paragraph 56(1)(d.2) and section 75.2.
These rulings are subject to the limitations and qualifications set forth in Information Circular IC 70-6R9 dated April 23, 2019 and are binding on the CRA, provided that the Proposed Transaction described in paragraph 20 above is effected on or before XXXXXXXXXX, the Proposed Transaction described in paragraph 21 above is effected within the time limits set out for filing Form T2019, and the Proposed Transaction described in paragraph 22 above is effected within the time limits set out in the preamble of paragraph 60(l).
SCOPE OF THE RULINGS AND OTHER COMMENTS
For the purposes of this letter, only the facts and proposed transactions described above have been considered. The documentation provided in support of your application does not form part of the facts and proposed transactions.
Furthermore, the rulings should in no way be construed as an acquiescence on the part of the CRA that:
(a) the amount attributed to a property in the Statement of Facts or Proposed Transactions truly represents the FMV of the property; and
(b) we have considered the other tax consequences that may result from the Proposed Transactions set out in this letter.
A statement of our fees for the time spent on your file will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
For the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch