8 May 2000 External T.I. 2000-0015235 - NEPHEW REFUND OF PREMIUMS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: A taxpayer has a mentally handicapped adult nephew that currently lives with the taxpayer's mother but he may eventually live with the taxpayer. If the taxpayer's RRSP is left to her nephew on her death, will the amount paid out of the RRSP qualify as a refund of premiums?

Position: Only if the nephew is financially dependent on the taxpayer at the time of her death and is her "child".

Reasons: The nephew would have to qualify as the taxpayer's child under the extended meaning of child in subsection 252(1) of the Act.

XXXXXXXXXX 								2000-001523
M. P. Sarazin
Attention: XXXXXXXXXX 

May 8, 2000

Dear Sirs:

Re: Refund of Premiums

This is in response to your letter dated March 20, 2000, wherein you requested a ruling as to whether a taxpayer could leave her registered retirement savings plan (RRSP) to her disabled nephew on her death and whether the amount could be rolled over to an RRSP or RRIF for the nephew.

The nephew is forty years of age and is mentally disadvantaged. His parents are dead and he lives with his grandmother, the taxpayer's mother. His living expenses are paid from funds received from provincial financial assistance and from a discretionary testamentary trust established by his father. He also relies on the taxpayer and his grandmother for financial support.

The grandmother is aging and, on her death or inability to continue to look after the nephew, the taxpayer will assume responsibility for him. The taxpayer was appointed guardian of the nephew's assets under a Court Order issued in 1993.

Comments

A request for an advance income tax ruling with respect to proposed transactions involving specific taxpayers will only be provided where the request has been submitted in accordance with the requirements established by the Canada Customs and Revenue Agency (the "Agency") as set out in Information Circular 70-6R3. Copies of Information Circulars and Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.

The Agency's general views regarding the treatment of payments out of an RRSP on or after the death of its annuitant are found in Interpretation Bulletin IT-500R. We note that paragraphs 9 and 17 to 26 of IT-500R deal specifically with refunds of premiums and paragraphs 27 and 28 of IT-500R deal with the rollover provisions related thereto.

When the annuitant under an RRSP dies, subsection 146(8.8) of the Income Tax Act (the "Act") deems the annuitant to have received, immediately before death, a benefit equal to the fair market value of the property held in the RRSP at that time (IT-500R paragraph 5). Under proposed legislation, for deaths occurring after 1998, the amount included in the deceased annuitant's income as a result of his or her death may be reduced by an amount paid to the deceased annuitant's financially dependent child or grandchild (hereafter referred to as "child") even where the deceased annuitant had a spouse at the time of his or her death. Consequently, any amount paid out of the deceased annuitant's RRSP to a financially-dependent child of the deceased annuitant will qualify as a "refund of premiums" (IT-500R paragraph 9 - note that the proposed legislation is not reflected in the comments provided therein).

With respect to the requirement that the child be financially dependent on the annuitant at the time of the annuitant's death, the Agency takes the position that this occurs if, before death, the child resided with and depended on the annuitant, and the child's net income for the previous year was not more than the total of the amount claimed at line 300 of the child's return for that preceding year plus $500. A child is still considered to have resided with the annuitant if, before the annuitant died, the child lived away from home for educational reasons. If the child's net income was more than the amount described above, the child will not be considered to be financially dependent on the annuitant at the time of death, unless the child can establish the contrary. In such a case, the child or the deceased's legal representative should submit a request in writing to the child's tax services office outlining the reasons why we should consider the child financially dependent on the annuitant at the time of death.

With respect to the second requirement that the beneficiary of the RRSP amount be a "child or grandchild" of the deceased annuitant, under subsection 252(1) of the Act, a "child" includes:

(a) a person of whom the taxpayer is the natural parent whether the person was born within or outside marriage,

(b) a person who is wholly dependent on the taxpayer for support and of whom the taxpayer has or immediately before the person attained the age of 19 years had, in law or in fact, the custody and control,

(c ) a child of the taxpayer's spouse,

(d) an adopted child of the taxpayer, and

(e) a spouse of a child of the taxpayer.

Unless the nephew qualifies as a child under the extended meaning of child found in subsection 252(1) of the Act, the amount paid to the nephew out of the taxpayer's RRSP on her death will not qualify as a refund of premiums. In the situation you describe, only (d) of the definition is relevant.

Since a legal adoption of the nephew has not occurred, the determination of whether de facto adoption has occurred will be a question of fact. In our view, the fact that an individual is appointed guardian of a child does not, in and of itself, constitute adoption in fact. We note that there are a limited number of reported income tax cases dealing with de facto adoptions. Generally, the courts will not recognize a de facto adoption unless the "adoptive" parent exercised parental care and guidance on a continuing basis. The factors to look for in determining whether a certain relationship between a person and a child constitutes an adoption in fact are actual control and custody, an exercise of parental care and responsibility on a continuing basis, dependency, and proximity to each other.

We trust that the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate