Principal Issues: (1) Whether subsection 73(1) can apply to the transfer of RRSP proceeds by the estate of the deceased annuitant to the surviving spouse? (2) Whether subsection 146(8.1) can apply to such a transfer where the surviving spouse is not a beneficiary of the estate?
Position: (1) No. (2) No.
Reasons: (1) Subsection 73(1) only applies where the transferor is an individual other than a trust. (2) Subsection 146(8.1) requires the spouse to be a beneficiary under the deceased’s estate.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2022
APFF CONFERENCE 2022
13. Transferring a Registered Retirement Savings Plan to a former spouse
Assume the following hypothetical facts, described chronologically:
- Mr. X and Ms. Y were married under the laws of the province of Quebec;
- A judgment of separation between Mr. X and Ms. Y was rendered;
- The judgment of separation recognized that Ms. Y had rights arising from the partition of the family patrimony and the dissolution of the matrimonial regime;
- Ms. Y had a claim of $100,000 as a result of the division of the family patrimony and the matrimonial regime;
- Mr. X died and Ms. Y was not an heir under Mr. X's will;
- No agreement was signed before Mr. X's death to settle Ms. Y's rights arising from the division of the family patrimony and matrimonial regime;
- At the time of his death, the registered retirement savings plan ("RRSP") held by Mr. X had not matured;
- The estate intends to distribute $100,000 from Mr. X's RRSP to Ms. Y in settlement of the family patrimony and matrimonial regime.
Questions to the CRA
(a) In these circumstances, is it possible to transfer the $100,000 from Mr. X's RRSP to Ms. Y on a tax-free basis under subsections 73(1) and 73(1.01) of the Income Tax Act (footnote 1)?
(b) Alternatively, can paragraph 248(23.1)(a) apply to treat the RRSP amount transferred to Ms. Y as a refund of premiums for the purposes of subsection 146(8.9) and paragraph 60(l)? In this regard, we refer you to Technical Interpretation 2004-0073441E5 (footnote 2).
(c) Finally, would the answers to the above questions be different assuming the following facts:
- There was no judgment of separation before Mr. X's death;
- Mr. X's death still resulted in a claim of $100,000 in favour of Ms. Y arising from the division of the family patrimony and the dissolution of the matrimonial regime.
Please note that under the laws of the province of Quebec, a judgment of separation does not dissolve the marriage bond (footnote 3).
CRA Response to Question 13(a)
For subsection 73(1) to apply, one of the requirements is that capital property of an individual (other than a trust) has been transferred in circumstances to which 73(1.01) applies. In the situation described above, since Mr. X is deceased, it is Mr. X's estate that intends to pay Ms. Y the $100,000 from Mr. X's RRSP. The definition of "trust" in subsection 248(1) indicates that a trust includes an estate. Consequently, one of the requirements of subsection 73(1) would not be met since the transfer would be made by the estate which is a trust.
CRA Response to Questions 13(b) and 13(c)
Under subsection 146(8.8), where the annuitant under a RRSP dies before the maturity of the RRSP, the annuitant is deemed to have received, immediately before the annuitant’s death, an amount as a benefit equal to the FMV of all the property of the RRSP at the time of death. This amount must be included in computing the deceased annuitant's income in the year of death pursuant to subsection 146(8) and paragraph 56(1)(h).
Subsection 146(8.9), however, allows the amount deemed to be received under subsection 146(8.8) to be reduced by an amount not exceeding the amount determined by the formula in that subsection. In order for that provision to apply, an amount that qualifies as a "refund of premiums", as defined in subsection 146(1), must have been paid (footnote 4).
A "refund of premiums" within the meaning of subsection 146(1) includes, inter alia, any amount paid to the spouse or common-law partner ("Spouse") of the annuitant under an RRSP where the annuitant has died prior to the maturity of the RRSP and the amount is paid to the Spouse as a result of the death, other than a tax-paid amount (footnote 5) in respect of the RRSP.
Where the Spouse is named as the beneficiary of the RRSP under a valid beneficiary designation in the RRSP contract or in the annuitant's will, CRA considers that the amount received by the Spouse from the RRSP is paid to the Spouse out of or under the RRSP as a consequence of the death of the annuitant. The amount received by the Spouse may therefore be considered a refund of premiums without any further formality. On the other hand, where the proceeds of a deceased annuitant's RRSP are paid to the annuitant's legal representative (footnote 6) and the Spouse receives the RRSP proceeds from the estate, the Spouse has not received the amounts under the RRSP. This situation does not meet the definition of "refund of premiums" under subsection 146(1).
In such a case, subsection 146(8.1) specifies that if a payment out of or under a RRSP of a deceased annuitant to the annuitant’s legal representative would have been a refund of premiums if it had been paid under the plan to an individual who is a beneficiary (as defined in subsection 108(1)) under the deceased’s estate, the payment is, to the extent it is so designated jointly by the legal representative and the individual in the prescribed Form T2019 (footnote 7) filed with the Minister, deemed to be received by the individual (and not by the legal representative) at the time it was so paid as a benefit that is a refund of premiums. Thus, in order to be able to make the joint election, subsection 146(8.1) requires that the Spouse be a beneficiary (as defined in subsection 108(1)) of the annuitant's estate.
By virtue of 248(23.1)(a), where property is, after the death of a taxpayer, transferred or distributed to a person who was the taxpayer’s Spouse at the time of the death, or acquired by that person, under the laws of a province relating to the rights of Spouses to property arising out of a marriage (including, for example, rules relating to the division of family property or the dissolution of a matrimonial regime), the property shall be deemed to have been so transferred, distributed or acquired, as the case may be, as a consequence of the death. This paragraph does not, however, deem the deceased taxpayer's Spouse to be a beneficiary of the deceased's estate.
The determination of whether a person is a beneficiary or a creditor of an estate is a question of law and fact that can only be determined after a full examination of the applicable private law, the terms of the will, if any, and all the relevant facts surrounding a given situation.
Thus, in the situation described, paragraph 248(23.1)(a) would have the effect of providing that the transfer of amounts from Mr. X's RRSP paid by his estate to Ms. Y to satisfy a debt owed by the estate to Ms. Y, and resulting from the partition of the family patrimony and the dissolution of the matrimonial regime, would be deemed to have been made as a consequence of Mr. X's death. However, this paragraph would have no impact on the requirement in subsection 146(8.1) that Ms. Y be a beneficiary of Mr. X's estate. Consequently, to the extent that Ms. Y would receive the RRSP proceeds from the estate, not as a beneficiary of Mr. X's estate but, rather, as a creditor of his estate, subsection 146(8.1) could not apply.
The CRA is aware that, in light of this conclusion and Technical Interpretation 2017-0707801C6, (footnote 8) the result differs depending on whether the deceased taxpayer was, at the time of death, the annuitant of an unmatured RRSP or the annuitant of a registered retirement income fund. It is not clear that this difference is consistent with tax policy. We have advised the Department of Finance of this interpretation.
Nathalie Boyer
October 7, 2022
2022-094218
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 R.S.C. (1985), c. 1 (5th Supp.) (”I.T.A.”).
2 Canada Revenue Agency, Technical Interpretation 2004-0073441E5, June 1, 2004.
3 Civil Code of Quebec, Article 739.
4 Where applicable, the amount that reduces the amount deemed to be received by the deceased annuitant under subsection 146(8.8) will not be taxable as the income of the deceased annuitant, but rather as the income of the taxpayer who receives that amount.
5 As defined in subsection 146(1) I.T.A..
6 As defined in subsection 248(1) I.T.A., the term "legal representative" includes the executor.
7 Canada Revenue Agency, Form T2019 "Death of an RRSP Annuitant - Refund of Premiums
8 CANADA REVENUE AGENCY, Technical Interpretation 2017-0707801C6, October 6, 2017.