Principal Issues: Whether an amount paid out of a RRIF to the estate of a surviving spouse who died shortly after the death of the deceased annuitant can qualify as a designated benefit?
Position: No.
Reasons: Wording of the definition of “designated benefit” in subsection 146.3(1). The amount has to be paid to the surviving spouse while the spouse is alive or, if applicable, the spouse has to be alive at the time the joint election is made. The spouse's estate cannot receive or be deemed to have received a designated benefit.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2022
2022 APFF CONFERENCE
8. Registered retirement income fund benefits following the death of the annuitant and payment to the estate of the surviving spouse
In Technical Interpretation 2020-0867001E5 (footnote 1), the CRA considered that for an amount to qualify as a "designated benefit" as defined in subsection 146.3(1) of the Income Tax Act (footnote 2), the eligible survivor must be alive at the time the benefit is paid or the joint election is made.
However, in our view, there is nothing in the definition of "designated benefit" in subsection 146.3(1) or in the definition of "refund of premiums" in subsection 146(1) indicating that the spouse or common-law partner (the "Spouse") must be alive at the time of receipt of the benefit and there is no rule similar to the requirement for indefeasible vesting (such as for rollovers under subsection 70(6), which should be read in conjunction with subsection 248(9.2) for capital property) for transfers from registered plans following death.
Question to the CRA
Can the CRA explain its position?
CRA Response
Where the last annuitant under a registered retirement income fund ("RRIF") dies, that annuitant is deemed to have received, immediately before death, an amount out of or under the registered retirement income fund equal to the fair market value of the property of the fund at the time of the death, pursuant to subsection 146.3(6). This amount is included in the annuitant's income in the year of death, pursuant to subsection 146.3(5) and paragraph 56(1)(t). However, subsection 146.3(6.2) provides for a calculation that, under certain conditions, reduces the amount that the deceased is deemed to have received immediately before death pursuant to subsection 146.3(6). In order for subsection 146.3(6.2) to apply, an amount that qualifies as a designated benefit must have been paid (footnote 3).
The term "designated benefit" is defined in subsection 146.3(1) and under that definition two types of amounts can be a designated benefit.
The first type is provided for in paragraph (a) of the definition "designated benefit" in subsection 146.3(1) and corresponds to amounts paid out of or under a RRIF, after the death of its last annuitant, to the legal representative of the annuitant that meet the following conditions:
(i) They would be "refunds of premiums" as defined in subsection 146(1) (footnote 4), assuming that the amounts were paid to the individual out of the RRIF and assuming that the RRIF was an unmatured RRSP before the annuitant's death.
(ii) They are designated jointly by the legal representative and the individual in prescribed form filed with the Minister.
For the purposes of the situation described, the individual is, for the purposes of paragraph (a), the Spouse (footnote 5). Since the joint designation must be made jointly by the deceased annuitant's legal representative and the Spouse, in order for the designation to be valid, the Spouse must be alive at the time the joint designation is made. A joint designation made by the deceased annuitant's legal representative and the deceased Spouse's legal representative would not satisfy this requirement.
The second type of amount that qualifies as a designated benefit is provided for in paragraph (b) of that definition. Under that paragraph, a designated benefit refers to amounts paid out of a RRIF to the individual who is, inter alia, a Spouse (footnote 6), after the death of the last annuitant, which would be refunds of premiums, assuming that the RRIF was an unmatured RRSP prior to the death. Paragraph (b) therefore covers situations where amounts are not paid to the deceased annuitant's legal representative but rather are paid directly to the individual referred to in paragraph (b).
Thus, in the situation described, in order for this condition to be satisfied, the amounts must be paid directly to the Spouse. The payment of the amounts to the Spouse's estate does not satisfy this condition.
The Spouse's estate is not the individual referred to in the definition of "designated benefit" in subsection 146.3(1) and therefore cannot receive or be deemed to have received a designated benefit. Only a contemplated individual, in this case, the Spouse, can receive an amount that is a designated benefit.
In sum, the Spouse must be alive at the time the amounts are paid to the Spouse or, if applicable, at the time the joint designation is made.
Finally, the fact that the definitions of "designated benefit" in subsection 146.3(1) and "refund of premiums" in subsection 146(1) do not include any requirement that property has vested indefeasibly in the Spouse, as is the case in subsections 70(6) and 248(9.2), has no impact on our conclusions.
Nathalie Boyer
October 7, 2022
2022-094096
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Revenue Agency, Technical Interpretation 2020-0867001E5, March 12, 2021
2 R.S.C. 1985, c. 1 (5th Supp.) (the "I.T.A.").
3 The amount, if any, by which the amount deemed to be received by the deceased annuitant under subsection 146.3(6) is reduced will not be taxable in the income of the deceased annuitant, but rather in the income of the taxpayer who receives the amount.
4 Generally, a "refund of premiums" within the meaning of subsection 146(1) includes any amount paid out of an RRSP as a consequence of the death of the annuitant of the RRSP to an individual who was, immediately before the annuitant's death, either the annuitant's Spouse (where the annuitant dies before the maturity of the plan) or the annuitant's financially dependent child or grandchild, other than a tax-paid amount as defined in subsection 146(1), in respect of the RRSP. Where the Spouse is named as the beneficiary of the RRSP from the RRSP contract, the CRA considers that the amount so received is paid out of an RRSP as a consequence of the death of the annuitant. The amount received by the Spouse may be considered a refund of premiums without any further formality.
5 The individual could also have been the child or grandchild of the annuitant who, immediately before the annuitant's death, was financially dependent on the annuitant.
6 As with paragraph (a), the individual could also have been a child or grandchild of the annuitant who, immediately before the annuitant's death, was financially dependent on the annuitant.