On death, a person’s property is deemed disposed, including funds held in registered retirement savings plans and registered retirement income funds. The RRSP or RRIF value is brought into income in the deceased’s terminal year. In addition to triggering taxation sooner than the family may wish, this can contribute to a higher tax bill than anticipated due to the lump sum being taxed in a single year.
Relief is available by certain tax-free rollovers to qualified beneficiaries: a spouse, a dependent minor child, or a disabled dependent minor or adult child. Commonly this can be achieved through direct beneficiary designation on the plan, or alternatively if the funds have fallen into the estate then by joint election between the deceased’s personal representative (executor) and a qualified beneficiary who has a sufficient entitlement as an estate beneficiary. The procedure for spouse beneficiaries is typically straightforward, but could be more complicated with a minor or mentally infirm individual.
Putting the focus on minors, even if there is a remaining surviving parent, that parent is generally the automatic guardian of the child’s person but not of property. Approval of the provincial public trustee or other court order will be necessary to make the election and execute a legal contract for the required annuity to age 18 – and having those funds in such a young person’s hands without oversight is likely not a desirable result. These hurdles were addressed in a unique fact situation in a recent advance income tax ruling from the Canada Revenue Agency (CRA).
Income Tax Act (ITA) Canada
Paragraph 56(1)(t) and parts of section146.3 – These provisions work together to allow the value of a RRIF to be a designated benefit (income inclusion) of a beneficiary rather than the deceased/estate.
Section 60.011 – A lifetime benefit trust may be established for a minor child or grandchild who was dependent on a deceased by reason of mental infirmity. A qualifying trust annuity may be purchased with the trust funds.
Paragraph 56(1)(d.2) and section 75.2 – These provisions cause income paid to a qualifying trust annuity to be included in the income of the trust beneficiary.
CRA 2016-0627341R3 (E) – Rollover of RRIF proceeds after death
The exact date of this advance income tax ruling is redacted, but it was issued some time in 2016.
The minor child was adopted by his grandmother because his parents were incapable of caring for him. A court issued a parenting order providing that the grandmother had “all powers, responsibilities, entitlements of guardianship and decision-making regarding the grandson.” Furthermore, it was clear that he was financially dependent on her and no-one else.
Unfortunately a difficult situation got worse when it was determined that the grandmother had a terminal medical condition. As part of arranging her affairs, she named her son as executor under her will, and executed an authorization for that son and his wife to apply to adopt the grandson (presumably their nephew). Two RRIFs came into the grandmother’s estate upon her death, the combined value of which was less than the grandson’s share of the estate.
The proposal to CRA goes into a number of steps, including reference to the above ITA sections, essentially having the RRIF go by tax-free rollover to an annuity that will pay out over the years until the grandson reaches 18. The payments will be received by the trust, but will be taxable to the grandson whose basic personal tax credit will negate much or all of any tax.
In approving the proposal, the CRA acknowledges the dual-purpose to reduce taxes otherwise arising on the grandmother’s death and to allow the executor to maintain control over the funds. Though not stated in the ruling, take note that the minor child must have had a mental infirmity in order for ITA s.60.011 to have applied. This also skirts the issue of having the minor enter into the contract for the annuity, as it is the executor/trustee of the lifetime benefit trust who carries out that purchase.
- Directly naming minors or mentally infirm individuals as RRSP/RRIF beneficiaries may enable tax deferral, but it does not resolve all complications and hurdles.
- Though there is only brief mention of the grandmother’s parenting court order and the presumed/forthcoming adoption order in the ruling, those seem to have facilitated the process. Together with the child’s apparent mental infirmity, an acceptable result is obtained.
- More generally, all parents and guardians of minors should be conscious of the need to coordinate beneficiary designations with will provisions to satisfy their estate planning needs.