23 September 1999 External T.I. 9915945 - DESIGNATED BENEFIT OUT OF RRIF

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:

Whether on the death of an annuitant a child of the annuitant who is over 18 years of age and is not financially dependent would be eligible as a beneficiary to designate jointly with a legal representative an amount in respect of an RRIF as a designated benefit.

Position TAKEN:

No. General comments provided

Reasons FOR POSITION TAKEN:

A child cannot receive a designated benefit if annuitant had a spouse. However, the 1999 federal budget proposes that a financially dependent child would be eligible to receive a designated benefit under the RRIF rules for deaths occurring after 1998.

XXXXXXXXXX 5-991594
P. Diguer
September 23, 1999

Dear XXXXXXXXXX:

Re: "Designated Benefit" Out of a
Registered Retirement Income Fund

This is in reply to your letter dated May 19, 1999, in which you ask us to confirm who can receive a "designated benefit" out of a registered retirement income fund ("RRIF") on the death of the annuitant of the RRIF. In particular you ask that we confirm that your daughter (who is over 18 years of age and is not financially dependent on you nor, for income tax purposes, dependent on you because of a physical or mental infirmity) would be eligible to receive a designated benefit. The expression "designated benefit" is defined in subsection 146.3(1) of the Income Tax Act (Canada) (the "Act") and is described more fully hereunder.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996 ("IC-70-6R3") (copy enclosed). The Directorate also provides technical interpretations of the various provisions of the Act but we do not provide tax planning advice.

The facts outlined in your letter relate to actual transactions involving particular taxpayers and therefore a binding determination from the Department can only be obtained by way of an advance income tax ruling request following the procedures outlined in IC-70-6R3. Nevertheless, we offer the following general comments concerning the relevant RRIF provisions under the Income Tax Act (the "Act") which we hope are of assistance to you.

Briefly, as stated on page 18 of the guide titled "RRSPs and Other Registered Plans for Retirement 98" (copy enclosed) and in the opening comments provided on form T1090(E) titled "Death of a RRIF Annuitant - Designated Benefit" (the "Form"), upon the death of the last annuitant of a RRIF, the annuitant is deemed to have received immediately before death an amount out of the RRIF equal to the fair market value of the property at the time of death. This amount is included in the deceased annuitant's income for the year of death.

However, the amount that has to be reported on the deceased annuitant's final return for the year of death can be reduced by an amount not exceeding a specific percentage of the total designated benefits in respect of the RRIF if:

• the deceased annuitant's spouse is paid an amount from the deceased annuitant's RRIF; or
• if the deceased annuitant has no spouse at the time of death, a payment is made to a child or grandchild (hereafter referred to as "child") of the last annuitant who was financially dependent on the annuitant for support at the time of the death. For this purpose, it is assumed that, unless the contrary is established, a child was not financially dependent on the annuitant at the time of the annuitant's death if the income of that child for the taxation year preceding the year of death exceeded $500 and the basic personal credit in subsection 118(1) of the Act ($6456 for 1998). To establish the contrary, the child or the child's legal representative may write to the tax services office outlining the reasons why the child should be considered financially dependent on the annuitant at the time of death.

Note that the 1999 federal budget proposes several changes to the Act and includes a proposal that the rules applying on the death after 1998 of an annuitant under a RRIF be modified so that a financially dependent child may receive a designated benefit even if there is a surviving spouse.

In computing the child's income for purposes of determining financial dependence for purposes of determining eligibility for a designated benefit, the inclusion or exclusion of a social assistance payment received by a child or grandchild will depend on whether the amount received is included in the child or grandchild's net income. You may refer to the General Income Tax Guide to determine whether certain amounts have to be included in the recipient's net income.

Amounts that are "designated benefits" are taxable to the recipient in accordance with subsection 146.3(5) and paragraph 56(1)(t) of the Act. However, designated benefits paid from the last annuitant's RRIF to the deceased annuitant's spouse or to the financially dependent child or grandchild who was also dependent on the last annuitant because of a physical or mental infirmity ("eligible recipient") may be deductible by the eligible recipient if the amount is used by the eligible recipient to acquire an annuity as described in subparagraph 60(l)(ii) of the Act, pay an amount as a premium under the eligible recipient's RRSP or as pay as consideration for the eligible recipient's RRIF.

You also indicate that you wish to designate your daughter as the recipient of a RRIF "in trust". Please note that if your daughter was eligible to receive a "designated benefit" (i.e. both financially dependent on the annuitant at the time of the death and dependent by reason of mental infirmity) 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. To help calculate the amount by which the deceased annuitant's income can be reduced and for a discussion of the tax-free transfer options or to request a copy of Form T1090 (Death of a RRIF Annuitant - Designated Benefit), please write or phone your local tax services office as follows.

Windsor Tax Services Office
185 Ouellette Street
Windsor ON N9A 5S8
Telephone (519) 258-8302
Facsimile (519) 973-7188

We trust our comments will be of assistance to you.

Yours truly,

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

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