CRA applies the surrogatum principle (but only in the year of receipt) to tax RRSP proceeds received under an unclaimed-property procedure
The estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the Commission as the sole estate beneficiary.
CRA found that the amount paid to the surviving spouse was to be included in her income under the surrogatum principle as being in lieu of a payment received under s. 146(8). A number of key related points were addressed:
- Although the benefit derived by the surviving spouse would normally have been excluded from her income on the basis that it was “included in computing the income of an annuitant” (i.e., her deceased husband) under s. 146(8.8), this in fact was not done (she did not know about the RRSP in preparing his terminal return) so that this exclusion did not apply (i.e., “included” is narrower than “includible”).
- Although the Commission (which effectively was her agent) had received the RRSP proceeds in an earlier taxation year, it was not to be included in her income until the subsequent year when she was ascertained and received the amount from the Commission, -on the basis of the “longstanding position … that the CRA must … rely on the facts as they exist at the end of the taxation year” – and the essential basis for income inclusion was not identified until the subsequent year.
- The surrogatum principle applied given that s. 146(8) would have applied but for the interposition of the Commission, and the amount received by her effectively was in lieu of that amount.
- Although she received the amount as the heir of an estate that had ceased to exist rather than as a designated beneficiary, this was not considered to be a barrier to the suggested treatment.
- The benefit to be recognized by her under s. 146(8) was to be grossed-up by the amount of fees that were deducted by the Commission and treated by the governing unclaimed property legislation as an obligation of her – and such fees were not deductible by her as they were not “incurred for the purpose of earning income.”