At issue

Where there is a beneficiary designation on a RRSP or RRIF, the funds in the respective account at the annuitant’s death will be paid to the named beneficiary. Specifically, it is the gross funds that the financial institution will pay out, with the associated tax liability being borne by the estate of the deceased. If the estate does not have sufficient assets to pay the tax liability, the Canada Revenue Agency can seek payment of the associated taxes from the beneficiary.

Depending on circumstances, this can cause troublesome complications for a beneficiary, and also for the executor of such an estate.

2011-04022391I7 (E) – Insolvent Estate of a Deceased RRSP Annuitant

A deceased’s estate has primary liability for the income tax associated with inclusion of RRSP proceeds in the deceased’s terminal year income. Under ITA s.160.2(1), a beneficiary is jointly and severally liable, and CRA may look to the beneficiary to pay the proportional taxes when an estate is insolvent.

This liability applies whether the beneficiary is a Canadian resident or non-resident. The law cannot however be enforced against a non-resident, as courts of one country will not generally enforce the revenue laws of another country.

2011-0429101C6 (E) – 2011 STEP Conference – Q20 – Insolvent Estates

CRA responded on a series of questions involving insolvent estates.

The Crown has priority over other general estate creditors, though it will stand behind secured creditors. Once an estate is assigned into bankruptcy however, the Crown priority ceases to apply.

With respect to a RRIF that is paid from a financial institution to one or more named beneficiaries, any personal liability of the executor of the deceased’s estate will be limited to the assets under his or her control and that he or she has distributed. Presumably a direct payment to a plan beneficiary from the institution without intervention of the executor would not be determined to have been under the executor’s control.

Where an executor contemplates using estate assets to object to an income tax assessment, there is a risk that the executor could be liable for taxes if the estate is or becomes insolvent. If the executor engages an accountant on behalf of the estate for this purpose, there is a risk that the executor could be personally liable for that cost. Similarly, if the executor engages an accountant using his/her personal funds, there is no certainty that the estate will be obliged to reimburse the executor. A suggested alternative in this CRA letter is for the executor to assign the estate into bankruptcy, leaving it to the bankruptcy trustee to decide whether to object or appeal.

Practice points:
  • A named beneficiary should bear in mind the potential tax implications when receiving RRSP or RRIF proceeds. Before committing those received funds to a large expenditure (eg., travel, a capital purchase or lump sum mortgage payment), the beneficiary should have an understanding of the deceased’s financial circumstances. Such a beneficiary should proceed cautiously if there is a concern about the deceased’s solvency and/or the realizability of assets now held in the estate.
  • Prior to accepting the role, a named executor may wish to look into the financial status of the deceased, and in turn the prospects for the estate. To the extent the estate is or becomes insolvent, the executor may merely be acting to realize assets for the benefit of estate creditors, and not estate beneficiaries.