6 May 2004 External T.I. 2003-0039621E5 - RRIF - Claim against the estate

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.

Principal Issues:

Whether an amount paid to the surviving spouse pursuant to a claim that she made against the estate as a dependant spouse who has not been adequately provided for under the will be a designated benefit as defined in subsection 146.3(1) of the Act?

Position:

Question of fact but if the RRIF is transferred pursuant to a court order given under the legislation such as dependants relief or family law statute, it is the Agency view that the property transfer could be a designated benefit.

Reasons:

Amount must be paid as a consequence of death.

XXXXXXXXXX 2003-003962
L. J. Roy, CGA
May 6, 2004

Dear XXXXXXXXXX:

Re: Registered Retirement Income Funds ("RRIF") - Death of the annuitant

This is in reply to your letter of September 10, 2003 wherein you requested an advance income tax ruling on whether a designation can be made to the spouse of the last deceased annuitant with respect to the payment out of a RRIF in the following situation.

The last annuitant of a RRIF passed away and the beneficiary of the RRIF is the estate. His will provided that his spouse receives a life interest in his home and his grandchildren receive in trust the remainder interest of his estate. The surviving spouse decided to make a claim against the estate as a dependant spouse who has not been adequately provided for.

This Directorate can only provide written confirmation regarding the tax implications inherent in particular transactions where the transactions are proposed and are the subject matter of an advance income tax ruling request. You may refer to Information Circular 70-6R5 dated May 17, 2002 for more information concerning advance tax rulings. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA").

Upon the death of the last annuitant of a RRIF, subsection 146.3(6) of the Income Tax Act (the "Act") deems the annuitant to have received, immediately before death, an amount out of or under the RRIF equal to the fair market value of the property of the RRIF at the time of death. This amount is included in the deceased annuitant's income for the year of death pursuant to paragraph 56(1)(t) of the Act.

However, subsection 146.3(6.2) of the Act may reduce this income inclusion by permitting a deduction from the deceased annuitant's income for the year of death of an amount not exceeding a specific percentage of the total "designated benefits" in respect of the RRIF.

A "designated benefit" of an individual is defined in subsection 146.3(1) of the Act to include the total of such amounts paid out of or under the RRIF after the death of the last annuitant to the legal representative of the deceased annuitant as would, had they been paid under the RRIF to the individual, been a "refunds of premiums" if the fund been an unmatured registered retirement savings plan ("RRSP") and the amounts are jointly designated by the legal representative and the individual.

A "refund of premiums" as defined in subsection 146(1) of the Act, includes any amount paid out of or under an RRSP (other than a tax-paid amount in respect of the plan) as a consequence of the death of the annuitant under the RRSP to an individual who was, immediately before the death, a spouse of the annuitant. Consequently, an amount paid out to the spouse will be a refund of premiums only if the amount is paid as a consequence of the death of the annuitant.

It is a question of fact whether or not an amount is paid as a consequence of the death of the annuitant. However, it is the CRA's view that a property is transferred as a consequence of death where the property passes to a person pursuant to a court order given under legislation such as a dependants relief or family law statute. This position is based on the ratios in Hillis and Hillis v. The Queen 83 DTC 5365 (FCA) in which the three judges delivered separate reasons but in which all three accepted without question that the property had passed to the deceased's spouse as a "consequence of death".

Also, paragraph 248(23.1)(a) of the Act provides that where, as a consequence of the laws of a province relating to spouses' interests in respect of property as a result of marriage, property is, after the death of a taxpayer transferred or distributed to a person who was the taxpayer's spouse at the time of death, or acquired by that person, the property shall be deemed to have been transferred, distributed or acquired, as the case may be, as a consequence of death.

Subsection 146.3(6.11) of the Act also provides that all or a portion of the designated benefit (as determined under the provision) will be an "eligible amount" as defined under, and for the purposes of, subparagraph 60(l)(v) of the Act, if the individual is the spouse of the deceased annuitant.

Consequently, an amount that qualifies as a designated benefit will be taxable to the recipient in accordance with subsection 146.3(6.1) and paragraph 56(1)(t) of the Act. Where the beneficiary is the spouse, he/she may claim a deduction under paragraph 60(l) of the Act for the amount of a designated benefit that is included in his/her income. This deduction is only available if, in the year of receipt of the designated benefit, or within 60 days after the end of the year, the designated benefit is transferred to an RRSP, a RRIF, or an annuity as described in subparagraph 60(l)(ii) of the Act, under which the spouse is the annuitant.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch