17 September 1998 Internal T.I. 98206870 - RRSP Benefit, Deceased Annuitant

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:

Will amounts received from an RRSP by an estate several years after the annuitant's death be taxable when distributed to the beneficiaries of the estate?

Position: Probably not.

Reasons:

The income earned after the annuitant's death should probably be taxed in the RRSP which is specifically excluded from the definition of benefit.

								September 17, 1998

	REGINA TAX SERVICES OFFICE			HEADQUARTERS
M. Fitzgerald					M.P. Sarazin
	Director						952-9853

	Attention:  R. Hauff
								982068

RRSP Distribution where Annuitant Died in 1982

This is in reply to your facsimile dated August 12, 1998, wherein you requested our comments regarding the taxation of an amounts distributed from a registered retirement savings plan ("RRSP") where the annuitant of the RRSP died in 1982 and the plan issuer was not made aware of the death until late 1996.

XXXXXXXXXX (the "Taxpayer") died in 1982. The Taxpayer was the annuitant under an RRSP with the XXXXXXXXXX (the "Carrier") and the RRSP held property having a fair market value of $XXXXXXXXXX at the time of her death. The Carrier was not made aware of her death until the RRSP was scheduled to mature in 1996 (the Taxpayer would have turned XXXXXXXXXX in that year). Through the local Tax Services Office, the Carrier was able to identify the deceased's last known executor, a XXXXXXXXXX. The executor provided the Carrier with a copy of the required Letters Probate and the Carrier issued a cheque for $XXXXXXXXXX to the Estate of XXXXXXXXXX on XXXXXXXXXX, 1996. The executor will not release the funds to the Estate's beneficiaries until he is certain that his liability for taxes on the amount has been satisfied.

COMMENTS

It is the Department's view that an RRSP trust continues to be an RRSP trust even after the death of an annuitant, as this is provided for in paragraph 146(4)(c) of the Income Tax Act (the "Act").

Subsection 146(8) of the Act requires a taxpayer to include in income all amounts received in the year as a benefit out of an RRSP.

A benefit is defined in subsection 146(1) of the Act to include any amount received out of an RRSP, subject to several exclusions. Two of those exclusions relate to amounts that have previously been subject to tax and are discussed further in this memorandum.

Where an annuitant under an RRSP dies before the maturity of the plan, the annuitant is deemed, under the provisions of subsection 146(8.8) of the Act to have received (immediately before death) a benefit out of the RRSP equal to the fair market value of the property at the time of death. In order to avoid double-taxation when amounts are ultimately paid from the RRSP, there is an exclusion from the definition of benefit in subsection 146(1) for any amount received from an RRSP by a person who is not the annuitant that can reasonably be regarded as part of the amount included in the annuitant's income by virtue of subsection 146(8.8).

Where an amount should have been included in the income of the annuitant by virtue of subsection 146(8.8) but was not and can not be so included, the amount to be excluded from the definition of benefit (as described in the preceding paragraph) is nil. This is so because the wording in the exclusion refers to an amount that was included in the income of the annuitant, as opposed to an amount that was required to be included in the income of the annuitant. Consequently, the amounts paid out of such a trust after the death of an annuitant that should have previously been included in the income of the annuitant, will be a benefit out of an RRSP to the recipient thereof.

Subsection 146(4) of the Act exempts an RRSP trust from Part I tax on its taxable income with certain exceptions, one of which is in paragraph (c) thereof. Paragraph 146(4)(c) of the Act provides that an RRSP trust is taxable on its income for each year after the year of the last annuitant's death. Again, to avoid double-taxation when amounts are ultimately paid from the RRSP, the definition of benefit in subsection 146(1) of the Act excludes the amount of income of the RRSP which was not exempt from tax by virtue of paragraph 146(4)(c).

Accordingly, pursuant to paragraph 146(4)(c) of the Act, the RRSP trust should have reported its taxable income for each year after 1982 and paid tax thereon.

It is our understanding, based on Information Circular 78-14R2, that a trustee for a group of RRSP trusts can file a T3R-G return for the group of RRSP trusts, and need not file an individual T3R-IND return for each one. The T3R-G return is an information return and the Department does not issue an assessment or a notice that no tax is payable for these returns. Pursuant to paragraph 8 of Information Circular 78-14R2, a T3R-IND is to be filed for the years after the death of the annuitant, however, where the trustee is not informed of the death, it is likely that the trustee would continue to file the T3R-G on behalf of the RRSP trust. Since there has been no notice of assessment or notification that no tax is payable sent to the trustee, the years have not become statute barred. Subsection 152(3) states "liability for the tax under this Part is not affected ... by the fact that no assessment has been made", and subsection 152(7) states, "The Minister ... in making an assessment, may ... if no return has been filed, assess the tax payable under this Part.". Although the Department may have an administrative position of not assessing a year after a certain time, the years do not become statute barred without an assessment or notification that no tax is payable and accordingly, in these situations, we generally suggest assessing the RRSP trust for all of the relevant years (from 1983 to 1996). In this case, since the Taxpayer's estate would be jointly liable for the taxes under subsection 160(1) of the Act, we would have to collect the taxes owing from the amounts held by the estate

Arguments have been presented in the past that although the RRSP trust would have an income inclusion for the year because of the application of paragraph 146(4)(c) of the Act, it would also be entitled to a deduction for such income under paragraph 104(6)(b) of the Act because the beneficiaries have an enforceable claim to this income. Paragraph 2 of Interpretation Bulletin IT-286R2 states that a trust to which paragraph 104(6)(b) applies can deduct such part of its income as was payable in the year to a beneficiary and it also states that an amount is payable if it is paid or the beneficiary can enforce payment. Paragraphs 4 and 5 of IT-286R2 go on to state that an amount is not considered payable if the beneficiary can only enforce payment by either having the trust agreement amended or causing the trust to be wound up. The determination of whether the Taxpayer's estate had an enforceable right to the RRSP trust's income is a question of fact.

Although unlikely, if the Taxpayer's estate did have an enforceable right to the RRSP trust's income then the RRSP trust would have an income inclusion as a result of the application of paragraph 146(4)(c) offset by a deduction under paragraph 104(6)(b) of the Act. Since the RRSP trust would not have any income, an amount paid out of the RRSP trust to the Taxpayer's estate would not qualify for the exemption under paragraph (c) of the definition of benefit in subsection 146(1) of the Act.

The amounts distributed from the estate to the beneficiaries of the Taxpayer's estate do not constitute benefits from a RRSP under subsection 146(1).

SUMMARY

Where the fair market value of an annuitant's RRSP was not included as income in the annuitant's final return, such amount should be included in the recipient's (i.e. the estate's) income as a benefit when it was eventually paid from the RRSP. An RRSP trust continues as such after the death of the annuitant. It would be a question of fact based on the wording of the trust and the relevant legislation applicable to the property of deceased individuals whether the income of an RRSP trust was deductible pursuant to paragraph 104(6)(b) of the Act. If it was deductible, it should form part of the benefits paid from the RRSP when it was paid out to the estate. If it was not deductible, it should not be included as a benefit from a RRSP, but the income of the RRSP trust should be assessed under Part I for the relevant years and the taxes collected from the Taxpayer's estate.

We trust that the above comments will be helpful.

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