19 March 2004 External T.I. 2003-0051081E5 - Refund of premiums - financial dependent child

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 a child was financially dependent on a deceased annuitant at the time of the annuitant's death.

Position: General comments only.

Reasons: Question of fact.

XXXXXXXXXX 2003-005108
J. Gibbons, CGA
March 19, 2004

Dear XXXXXXXXXX:

Re: The Estate (the "Estate") of XXXXXXXXXX (the "deceased")

This is in reply to your letter email dated December 4, 2003, wherein you requested our views concerning the requirements that must be met by the deceased's child (the "child") to be considered financially dependent on the deceased before her death. You state that if this fact is established, you would be entitled "to adjust the deceased's returns for the last couple of years, as well as transfer the deceased's RRSP [registered retirement savings plan] to the dependent child tax free." You presented the following facts:

Facts

? The child is not physically infirm.

? The child does not claim to be mentally infirm. Rather, the child claims that he is dependent as a result of being fired from his job due to an alleged mental illness.

? The child has not been able to find a new job since being fired.

? Over the past couple of years, the child has been living in XXXXXXXXXX, and the deceased was living in XXXXXXXXXX.

? It does not appear that the deceased was financially supporting the child.

? No one is claiming an amount on line 305 [Amount for an eligible dependant] or line 315 [caregiver amount] in respect of the child.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

When the annuitant under an RRSP dies, a benefit under the RRSP is generally required to be included in the annuitant's income under subsection 146(8.8) of the Income Tax Act (the "Act"). Under subsection 146(8.9) of the Act, this benefit is reduced where a "refund of premiums" is paid from the RRSP. The maximum deduction under this provision is equal to a specified fraction of the total refunds of premiums in respect of the plan. (See paragraph 9 of IT-500R, Registered Retirement Savings Plans - Death of an Annuitant, for details on this calculation.) The amount deducted as a refund of premiums under subsection 146(8.9) must be included in the income of the beneficiary under subsection 146(8) of the Act as and when received.

As defined in subsection 146(1) of the Act, a "refund of premiums" generally includes an amount paid under an RRSP as a consequence of the death of the annuitant under the plan to a child or grandchild of the annuitant who was, immediately before death, financially dependent on the annuitant for support. A refund of premiums does not, however, include "tax paid amounts" paid under the plan. (See the note in paragraph 9 of IT-500R for the definition of a "tax paid amount.")

Where an amount is paid under an RRSP to the estate of the deceased annuitant, and a financially dependent child or grandchild is a beneficiary of the deceased's estate, the beneficiary and the estate may file a joint election pursuant to subsection 146(8.1) of the Act to designate all or a portion of the RRSP payment as a refund of premiums received by the beneficiary. In this regard, there is no requirement that the estate actually pay the designated amounts to the beneficiary. Rather, the amount designated under subsection 146(8.1) is deemed to be received by the beneficiary (and not by the estate) at the same time as the corresponding RRSP amount was paid to the estate. An election under subsection 146(8.1) must be filed with the Minister of National Revenue in prescribed form (Form T2019, Death of an RRSP Annuitant - Refund of Premiums). The amount deemed to be a refund of premiums reduces the deceased's income inclusion under subsection 146(8.8) to the extent allowed under subsection 146(8.9) and is included in the beneficiary's income under subsection 146(8).

It is a question of fact whether a financially dependent child or grandchild is a beneficiary of the deceased's estate so that the legal representative will be able to designate all or part of the amount received as a refund of premiums under subsection 146(8.1) of the Act. The representative is therefore required to consider all the circumstances, including the terms and conditions of the trust arrangement, in order to determine whether the amount received can be designated as a refund of premiums.

It is also a question of fact whether a child or grandchild was financially dependent on a deceased annuitant immediately before the annuitant's death. (Hereinafter a reference to a child will include a reference to a grandchild.) Subsection 146(1.1) contains a rebuttable presumption that a child is not financially dependent on the annuitant for support at the time of the annuitant's death if the income of the child for the year preceding the annuitant's death exceeded the basic personal amount for that preceding year (currently $7,634 for deaths occurring in 2003). For deaths occurring after 2002, this threshold is increased to $13,814 (indexed for deaths occurring after 2003) if the child has a mental or physical infirmity.

It should be noted that subsection 146(1.1) does not establish a corresponding presumption where a child's income is below the applicable threshold. That is, even if a child's income is below the applicable threshold, it still must be determined, based on the particular facts, whether the child was financially dependent on the deceased annuitant at the time of the annuitant's death. Some of the factors which may be considered in making this determination include the income of the child from all sources, the cost of living and the ability of the child to provide for self-support, and any support received by the child from other persons. If the child is living with another individual who is providing support for the child at the time of the annuitant's death, the child would not be considered to be financially dependent upon the deceased for support at that time.

Whether a child has a mental or physical infirmity is also question of fact, and, as regards your query concerning the completion of Form T2201, there is no requirement for the filing of this form or any other documentation to support a claim that a child was so infirm.

As the legal representative of the Estate, the onus is on you to review the facts to determine whether a child was financially dependent on the annuitant for support at the annuitant's death, and, in this regard, the child should provide you with the required information to enable you to make such a determination. If the child claims to have been dependent because of physical or mental infirmity, the child should provide you with sufficient facts to support such a claim. If, after reviewing all of the facts, you are still uncertain about the Estate's tax situation, you should contact the local tax services office, since they are able to provide assistance to taxpayers concerning the income tax consequences of completed transactions.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate

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