15 February 1999 External T.I. 9817845 - DISCRETIONARY TRUST, DESIGNATED BENEFIT

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: Could an amount still qualify as a designated benefit where a discretionary trust for the benefit of a financially dependent mentally infirm adult child is the beneficiary of the RRIF on the death of the last annuitant?

Position: No.

Reasons: Subsection 146.3(6.11) refers specifically to a “child or grandchild of the annuitant” so a discretionary trust will not qualify.

XXXXXXXXXX 							981784
M. P. Sarazin
February 15, 1999

Dear Sir:

Re: Trust for Financially Dependent Disabled RRIF Beneficiary

This is in reply to your letter dated June 22, 1998, wherein you requested clarification regarding the taxation of amounts held in a registered retirement income fund (“RRIF”) as a result of the death of the last annuitant of the RRIF.

Your letter relates to specific proposed transactions and, as such, we are unable to confirm the tax consequences except in the context of an advance income tax ruling. We can, however, provide the Department’s views regarding he following general questions.

Question #1

How does the Department determine whether a child is financially dependent on the RRIF annuitant? This is relevant for determining whether an amount qualifies as a designated benefit in order to be eligible for the tax-free rollover under paragraph 60(l) of the Income Tax Act (the “Act”).

Comments

In respect of the determination of financial dependence, the opening comments provided on Form T1090(E) titled “Death of a RRIF Annuitant - Designated Benefit” state:

“We consider you financially dependent if, in the year before the year in which the annuitant died, your net income (line 236 of your return) is equal to or less than the basic amount beside line 300 of the same return (for 1994 and 1995 this amount is $6,456). If your net income is more than the amount on line 130, we do not consider you financially dependent unless you can establish the contrary. In such a case, you or your legal representative should submit a request in writing to your tax services office outlining the reasons why we should consider you financially dependent on the annuitant at the time of death.”

The determination of whether social assistance would be included in a person’s net income would depend on the type of payment and whether there is an offsetting deduction for the social assistance payments in determining the recipient’s net income. You may wish to refer to the General Income Tax Guide to determine whether certain amounts have to be included in determining the recipient’s net income.

Question #2

Would an amount still qualify as a designated benefit and thus be eligible for the tax-free rollover where the last annuitant dies without a surviving spouse and names a discretionary trust for the benefit of the mentally infirm adult child of the annuitant as beneficiary of the RRIF on his or her death?

Comments

Subsection 146.3(6.11) of the Income Tax Act (the “Act”) refers specifically to a “child or grandchild of the annuitant”. Consequently, amounts left to a discretionary trust will not qualify as a designated benefit, within the meaning assigned by subsection 146.3(1) of the Act, for purposes of the rollover under paragraph 60(l) of the Act.

Where the last annuitant’s adult child is mentally infirm, we would expect that another person would be given the responsibility for taking charge of the personal affairs of the mentally infirm child and this person would have legal custody of the mentally infirm child’s assets. If this is not the case, the last annuitant could name his or her estate as the beneficiary of the RRIF on death. Under the terms of the last annuitant’s will, the property held in the RRIF could be left to the mentally infirm adult child. The deceased’s legal representative could make a designation, using Form T1090, to treat a qualifying amount as a designated benefit received by the financially dependent mentally infirm adult child which will be deemed to be received by the child in the year the amount was paid to the legal representative. The terms of the will could require the deceased’s legal representative to use the RRIF property to acquire an annuity, the terms of which could also be set out in the will, for the benefit of the mentally infirm adult child that qualifies for the deduction under the provisions of paragraph 60(l) of the Act. Consequently, the last annuitant could ensure that the mentally infirm adult child’s best interests are taken care of after his or her death while minimizing the amount that would have to be taxed on the last annuitant’s death under subsection 146.3(6) of the Act.

We trust these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch