4 May 2004 CALU Roundtable Q. 9, 2004-0065471C6 - RRSP rollover: minor or infirm 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: Can the legal representative of the deceased annuitant purchase a qualifying annuity for a financially dependant child?

Position: Yes.

Reasons: As long as the child is the sole beneficiary of the annuity held by a trust. A transfer of the amount as a refund of premiums may be made to an RRSP under which the child or the trust is the annuitant, where it is made by or on behalf of the child.

CALU - Conference for Advanced Life Underwriting (2004)

Question 9

RRSP Proceeds for Benefit of Minor or Infirm Child

The parent of a minor or infirm child wants the amount in the parent's RRSP to be used on his or her death to purchase an annuity for the benefit of the child. This could be achieved by designating the child as the beneficiary of the RRSP. On the parent's death, the child would use the RRSP proceeds to acquire the annuity, which would be payable to the child. In this case, assuming that the conditions are met for the RRSP payment to be a refund of premiums and that the annuity qualifies for the paragraph 60(l) of the Income Tax Act (the "Act") deduction, there would be a rollover for the RRSP proceeds.

Alternatively, the child could use the RRSP proceeds to purchase an annuity that is payable to a trust for the sole benefit of the child. Paragraph 60(l) of the Act permits this for a minor child, and the technical amendments that were released on February 27, 2004 would extend this option so that it is available for a mentally infirm child.

The parent may prefer, however, that the RRSP proceeds be paid directly to a trust for the benefit of the child, and that the trust uses the proceeds to acquire the annuity. It appears that if a trust is named as a beneficiary of the RRSP, and the trust uses the proceeds to acquire the annuity, there will be no rollover for the RRSP proceeds. One reason is that the payment to the trust will not qualify as a refund of premiums. Another is that paragraph 60(l) of the Act does not provide a deduction for trusts.

One way in which the parent can achieve the objective on a rollover basis without designating the child as beneficiary of the RRSP is to name the parent's estate as beneficiary, and to provide for the estate to purchase the annuity and have it designate a trust for the sole benefit of the child as the recipient of the annuity payments. In this case, if the parent's legal representative and the child file a prescribed form pursuant to subsection 146(8.1) of the Act, the RRSP proceeds will be deemed to have been received by the child as refund of premiums. Furthermore, the payment by the legal representative to the annuity issuer will be considered the payment of an amount on behalf of the child for purposes of paragraph 60(l) of the Act.

Question:

Does the Agency agree with all the statements made above?

Agency's Response

Paragraph 60(l) of the Act allows a deduction where a refund of premiums received by a child is used to buy an annuity described under clause 60(l)(ii)(A) or (B) of the Act.

A refund of premiums is defined in subsection 146(1) of the Act to be any amount paid out of or under an RRSP as a consequence of the death of the annuitant under the plan, to the spouse of the annuitant or to a child or grandchild of the annuitant who was, at the time of the death, financially dependent on the annuitant for support. It is a question of fact whether a child or grandchild was financially dependent on a deceased annuitant immediately before the annuitant's death. For this purpose, there is a rebuttable presumption that a child or grandchild is not considered to be financially dependent on the annuitant if the child or grandchild's income for the year preceding the taxation year in which the annuitant died exceeded the amount determined under subsection 146(1.1) of the Act.

In the circumstances described in the first and second scenarios, the conditions are met for the RRSP payment to be a refund of premiums if the child is financially dependent on the annuitant for support at the time of the death. When an amount is paid out of an RRSP to another person other than the spouse, a child or grandchild of the annuitant, like in the third scenario described above, this amount does not qualify as a refund of premiums.

However, when an amount is paid out of an RRSP to the legal representative of the deceased annuitant of the RRSP, and a portion of the amount would have been a "refund of premiums", as defined in subsection 146(1) of the Act, if it had been paid to a beneficiary of the deceased's estate, the legal representative and the beneficiary may make a joint designation in accordance with subsection 146(8.1) of the Act in respect of all or a part of the portion of the payment that would have been a refund of premiums. The amount so designated is thereby deemed to be an amount received by the beneficiary (and not by the legal representative) at the time it was so paid as a benefit that is a refund of premiums. In our view, subsection 146(8.1) of the Act is not applicable in the third scenario, as the RRSP proceeds are not paid to the legal representative of the deceased annuitant, which is the case in the fourth scenario.

The refund of premiums may be used to acquire an eligible annuity. Paragraph 60(l) of the Act requires that the annuity be an annuity, acquired by the child or on his behalf, under which the child, or a trust under which the child is, before his or her death, the sole person beneficially interested in a amount payable under the annuity. We are of the view that paragraph 60(l) of the Act will apply where there is an acquisition of an annuity on behalf of the child as this is the case in the fourth scenario.