11 May 2004 Internal T.I. 2004-0071401I7 - RRSP benefit - annuitant deceased in 1988

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: Tax implications of amounts received from a trusteed RRSP where the last annuitant died in 1988.

Position: Provided general comments.

Reasons: Tax treatment will be fact driven.

 		May 11, 2004

	XXXXXXXXXX  TAX SERVICES OFFICE	HEADQUARTERS
	Individual Programs Section	Income Tax Rulings
		   Directorate
	Attention:  XXXXXXXXXX 	P. Kohnen   

		2004-007140

Amounts paid from RRSP of Deceased Annuitant

This is in reply to your e-mail submission of March 5, 2004, requesting our comments on the tax implications relating to certain amounts paid during 2003 from a registered retirement savings plan ("RRSP") following the death of the plan annuitant.

As was noted in your submission, and our telephone conversation (Hassan/Kohnen) of April 22, 2004, the sole RRSP annuitant ("Mr. X") died XXXXXXXXXX, 1988. The estate of Mr. X was named as beneficiary in the RRSP contract, whereas the surviving spouse ("Mrs. X") and the three adult children of Mr. X (none of whom were financially dependent upon him X at his date of death) were named as beneficiaries of the RRSP in the will of Mr. X.

The financial institution (the "Issuer") that held the RRSP was unaware of the death of Mr. X until some time during 2003. As a result, the Issuer had unilaterally converted the RRSP to what it considered to be a valid registered retirement income fund ("RRIF") in the year in which the RRSP would have matured. Beginning with the 1994 calendar year, the institution issued a cheque each year in the name of Mr. X in respect of the minimum amount, as defined in subsection 146.3(1) of the Income Tax Act (the "Act"). When the cheques became stale-dated, an equivalent amount was withdrawn from the RRIF each year and placed in a separate account at the Issuer.

To date, no amounts held in the RRIF at the Issuer in respect of Mr. X have been paid out to the beneficiaries.

Our comments

The following references to specific provisions of the Act refer to the wording of the Act as it read at the applicable time.

We would agree with your assertion that subsection 146(8.8) of the Act would have deemed Mr. X to have received the fair market value of the property held by his RRSP at the time of his death. This amount should have been included in his income on the terminal return for Mr. X for 1988. Given the facts in this case and the amount of time that has passed, this amount cannot be so included.

An RRSP trust maintains its status as an RRSP trust following the death of the last plan annuitant, Mr. X, in this case; and, pursuant to paragraph 146(4)(c) of the Act, the RRSP trust would have been taxable on its income for each year after the year of death of Mr. X. Accordingly, the RRSP trust should have reported its taxable income for each year after 1988 and paid any applicable taxes thereon.

As was noted in our document 9812576, it is our view that the Issuer could not convert the RRSP into a valid RRIF after the death of the plan annuitant. The definition of a "retirement income fund" in subsection 146.3(1) of the Act refers to an arrangement between a carrier and an annuitant. The Issuer could not unilaterally enter into an arrangement with a deceased individual. Given this, the trust would still be considered to be an RRSP trust.

The definition of "benefit" in subsection 146(1) includes any amount received out of or under a retirement saving plan, subject to several listed exclusions. The exclusion for a "tax-paid amount", which is also defined in subsection 146(1), is contained in paragraph (c.1) of the "benefit" definition, and is applicable only to deaths occurring after 1992, thus it is not applicable to this case.

Paragraph (a) of the definition of "benefit" excludes an amount received by a person other than the plan annuitant that can reasonably be regarded as part of the amount included in computing the income of the annuitant by virtue of subsections 146(8.8) and (8.9). As noted above, no amounts were included in the income of Mr. X by virtue of subsection 146(8.8), as adjusted by subsection 146(8.9); thus, paragraph (a) will not apply to any amounts to be paid from the RRSP.

Based on the facts provided, paragraph (b) of the "benefit" definition is not applicable in this case (as no amount that was received by the RRSP issuer as a premium under the plan is under consideration).

Paragraph (c) of the definition of "benefit" provides for the exclusion of an amount, or part thereof, received in respect of the income of the RRSP trust for a taxation year for which the trust was not exempt from tax by virtue of paragraph 146(4)(c). It is this paragraph that is relevant to the facts of this case, as presented above.

Pursuant to paragraph 104(6)(b) of the Act, the RRSP trust could have deducted from its income for a taxation year before 1996, an amount that became payable in the year to a beneficiary of the trust. Once a RRSP trust is no longer exempt from tax after the death of the RRSP annuitant, paragraph 104(6)(a.2), which was added to the Act in 1998 and applicable to taxation years after 1995, provides that only trust income actually paid to a beneficiary in a taxation year is deductible in computing the income of the RRSP trust for that year. Based on the facts provided, we note that the cheques issued by the institution, as referred to above, were made payable to Mr. X, rather than to the beneficiaries of the estate. As was noted in our document 9904286, in which we considered a similar fact situation in which an RRSP issuer wrote cheques payable to a deceased annuitant, we would support an interpretive position that the cheques made payable to Mr. X would not constitute payments to the beneficiaries of the RRSP trust, as contemplated by paragraph 104(6)(a.2) of the Act. Accordingly, no deduction may be taken from the income of the RRSP trust for the years 1996 to 2003 inclusive for an amount paid to a beneficiary.

Pursuant to subsection 104(24) of the Act, an amount shall be deemed not to have become payable to a beneficiary in a taxation year, for purposes of, inter alia, subsection 104(6), unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount. As was noted above, no amount can be considered to have been paid to the beneficiaries of the RRSP trust. Accordingly, it must be determined whether the beneficiary of the RRSP trust was entitled to enforce payment of the trust income for years before 1996.

Interpretation Bulletin IT-286R2 comments on amounts payable from a trust for the purpose of applying subsection 104(6) of the Act. Paragraphs 4 and 5 of this IT provide examples of situations where the beneficiaries may have the power to amend the trust to cause its income to become payable, or to force the windup of the trust as a means of enforcing payment. In both cases, the IT notes that amounts are not considered payable until the powers are actually exercised and the trust either amended or wound up, as applicable. Although it would seem more likely, in this case, that no amount became payable to the beneficiary in the years after the death of Mr. X and to date, it is a question of fact as to whether the estate of Mr. X had an enforceable right to the income of the RRSP trust. To resolve this question of fact, one must consider, among other things, the terms of the RRSP trust and the relevant provincial laws relating to succession. The onus to prove that the income of the RRSP trust was payable to a beneficiary rests with the Issuer. In the absence of any current support for such a finding, the income should be reported as income of the RRSP trust.

Accordingly, a tax return should have been filed for each taxation year from 1989 through 2003 for which the RRSP trust had income. For years before 2001, the T3R-IND was the appropriate return for reporting income included under Part I of the Act. Beginning with the 2001 taxation year, the T3 Trust Income Tax and Information Return should have been filed.

Pursuant to subsection 152(4) of the Act, absent a waiver from the taxpayer or the existence of a misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under the Act, the Minister is constrained to making an assessment within the taxpayer's normal reassessment period, as defined in subsection 152(3.1). Given that no such returns have been filed in respect of the RRSP trust, none of the years in question would have become statute barred, as no normal reassessment period would have been established in respect of the taxation years in question. We have confirmed with Mr. Pierre Beaudry of the Trust and Pensions Section of the Individual Returns and Payments Processing Directorate that such assessments may be made where the facts of the case warrant. You may wish to contact the Trust and Pensions Section for guidance in applying any such assessment policy to this case.

As was noted above, pursuant to paragraph (c) of the definition of "benefit" in subsection 146(1) of the Act, any amount received from the RRSP trust in respect of the income of the RRSP trust for a taxation year in which it was not exempt from tax by virtue of paragraph 146(4)(c) will not be a benefit to the recipient and thus not included in the income of the recipient in accordance with subsection 146(8) of the Act. Conversely, should your determination of the facts warrant allowing the RRSP trust to deduct amounts pursuant to subsection 104(6) in respect of taxation years before 1996, amounts subsequently paid out of the RRSP trust in respect of earnings in the RRSP trust in those years will constitute a benefit to the recipient, and be included in income in the year of receipt.

Former subparagraph 146(1)(h)(i), as it applied to deaths prior to 1993, defines a refund of premiums to include any amount paid to a spouse of the annuitant, as a consequence of the annuitant's death, out of or under a registered retirement savings plan of the annuitant prior to its maturity. We agree with your observation that the definition of "refund of premiums", defined in former paragraph 146(1)(h) of the Act, is applicable to the death of Mr. X. In accordance with the wording of former paragraph 146(1)(h), as Mr. X had a spouse on his date of death, only an amount paid to the spouse would constitute a refund of premiums. Accordingly, only the spouse may jointly elect with the legal representative of the deceased in respect of amounts paid from the RRSP trust to the estate, in accordance with subsection 146(8.1) of the Act.

Paragraph 248(8)(b) of the Act provides that a transfer, distribution or acquisition of property as a consequence of a disclaimer by a person who was a beneficiary under the will or other testamentary instrument shall be considered to be a transfer, distribution or acquisition of the property as a consequence of the death of the taxpayer. Subsection 248(9) defines a "disclaimer" for the purpose of subsection 248(8) of the Act. The definition generally requires that it must be made within 36 months of the death of the taxpayer (or within a period acceptable to the Minister if written application has been made therefor within the 36 month period following the death of the taxpayer). As is noted in our document 9810265, a disclaimer is an outright refusal to accept a gift, share or interest under a will, with no stipulation as to how the taxpayer's legal representatives should distribute the unclaimed property. Given that the above time constraints have long passed, and your advice that it is unlikely that the adult children will disclaim in favour of Mrs. X, it would appear that you need not consider the impact of subsections 248(8) and (9) to this fact situation.

As you noted in your submission, once Mrs. X receives her share of benefits in respect of the RRSP trust assets from the estate, she may, as noted above, jointly elect with the legal representative of the deceased, in accordance with subsection 146(8.1) of the Act, to treat the amount received as a refund of premiums, for the purpose of a rollover to RRSP pursuant to paragraph 60(l) of the Act.

Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further assistance.

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate