25 October 1999 External T.I. 9925705 - DOSCRETIONARY TRUST, DISABLED CHILD, RRSP

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: Can amounts in a deceased annuitant's RRSP be paid to a discretionary trust for the benefit of a financially dependent disabled adult child of the deceased annuitant?

Position: Yes.

Reasons: The amount would constitute a refund of premiums for purposes of the Act. However, the 60(l) benefit for a rollover will only be allowed where the child is the annuitant under the RRSP or RRIF or the beneficiary under any annuity acquired with the funds.

XXXXXXXXXX 						992570
M. P. Sarazin
Attention: XXXXXXXXXX 

October 25, 1999

Dear Sirs:

Re: RRSP and Discretionary Trust for Disabled Child

This is in reply to your letter dated October 21, 1998, addressed to XXXXXXXXXX, wherein you requested our views regarding the transfer of registered retirement savings plan ("RRSP") property to a discretionary trust for the benefit of the deceased RRSP annuitant's disabled adult child.

You state that property held in a discretionary trust for the benefit of the disabled person does not jeopardize his or her rights to receive government benefits. Consequently, a parent's use of a discretionary trust will maximize the amount of money that will be available to provide for a disabled child's future safety and security.

Comments

We enclose a copy of Interpretation Bulletin IT-500R titled "Registered Retirement Savings Plans - Death of an Annuitant" which provides the Department's general views regarding the treatment of payments out of an RRSP on or after the death of its annuitant. We note that paragraphs 9 and 17 to 26 of IT-500R deal specifically with refunds of premiums and paragraphs 27 and 28 of IT-500R deal with the rollover provisions related thereto. We will provide general comments regarding the application of the Income Tax Act (the "Act") to the scenario described above and, whenever possible, reference will be made to the appropriate paragraphs in IT-500R.

When the annuitant under an RRSP dies, subsection 146(8.8) of the Act deems the annuitant to have received, immediately before death, a benefit equal to the fair market value of the property held in the RRSP at that time (IT-500R paragraph 5). The amount included in the deceased annuitant's income as a result of his or her death may be reduced by an amount called a "refund of premiums"; under proposed legislation, for deaths occurring after 1998, any amount paid to a financially-dependent child or grandchild of the deceased annuitant qualifies as a "refund of premiums". 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 total of $500 plus the basic personal amount for that preceding year (IT-500R paragraph 18 - note the $500 was added subsequent to the issuance of IT-500R and it is not reflected in the comments provided therein).

When an amount is paid from the deceased annuitant's RRSP to the annuitant's legal representative and the financially dependent child or grandchild is a beneficiary of the annuitant's estate, the annuitant's legal representative and the financially dependent child or grandchild may elect jointly to include in the financially dependent child or grandchild's income the portion of the payment that is designated as a refund of premiums (IT-500R paragraph 10). It is not necessary that the estate actually pay the designated amounts to the child or grandchild (IT-500R paragraph 10). We note that, as a result of amendments proposed in the 1999 Federal Budget Resolution, the requirement that the deceased annuitant have no spouse at the time of death before a financially dependent child or grandchild is eligible to receive a refund of premiums will be removed in respect of deaths occurring after 1998. It is a question of fact whether or not the legal representative of the deceased will be able to designate all or part of the amount received as a refund of premiums. The legal representative is therefore required to consider all the circumstances, including the terms and conditions of the estate arrangement, in order to determine whether the amount received can be designated as a refund of premiums (IT-500R paragraph 11).

Paragraph 60(l) of the Act allows a qualifying beneficiary who receives a refund of premiums from an RRSP (or a qualifying beneficiary who is deemed to receive the refund of premiums if it is paid to the estate and a subsection 146(8.1) designation is made) to defer the payment of tax on all or part of the amount (IT-500R paragraph 27). In order to qualify for the deduction under paragraph 60(l) of the Act, the refund of premiums would have to be contributed to an RRSP under which the child or grandchild is the annuitant, used to acquire an annuity for the child or grandchild or paid to a carrier as consideration for a registered retirement income fund ("RRIF") under which the child or grandchild is the annuitant. Note, however, that subsequent payments out of the RRSP, annuity or RRIF will be made to the child or grandchild and cannot be directed instead to a discretionary trust (IT-500R paragraph 27).

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate