31 October 2001 External T.I. 2001-0104605 - RRIF TRANSFER TO ESTATE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. The value of a RRIF is included in the income of a deceased annuitant at the time of death. The RRIF is passed through the estate to the deceased's adult children. All other assets of the deceased were owned jointly with the deceased's spouse so they do not become part of the estate. Is the deceased's estate wholly responsible for the tax assessed or can the taxes be paid with property that passed directly to the joint tenant?

2. Is there any way of obtaining other relief?

Position:

1. Provided a detailed explanation of the provisions of the Act that may apply to the situation and referred to other provisions that might also apply.

2. It was not clear what other income sources the deceased had at the time of death. It is possible some relief is available through the filing of special returns. We referred the writer to the Guide on preparing returns for deceased persons.

Reasons:

The writer requires specific advice that we are not able to provide. We can only provided general comments on the application of the law.

XXXXXXXXXX 2001-010460
W. C. Harding
October 31, 2001

Dear XXXXXXXXXX:

Re: Tax payable by Estate in respect of RRSPs and RRIFs

This is in reply to your facsimile of October 4, 2001, regarding your obligations as the executrix of your father's estate, to pay income taxes on amounts included as income on his final income tax return.

Our Comments

The Income Tax Rulings Directorate cannot provide any specific determinations of the tax consequences applicable to the situation outlined in your letter. Enquiries involving specific taxpayers or existing situations should be submitted, with all relevant facts and documentation, to the appropriate Tax Services Office for their views. In the alternative, we can provide the following comments that may be of assistance. These are general in nature and may not be applicable to all situations.

The Canada Customs and Revenue Agency (the "CCRA") has published a guide entitled Preparing Tax Returns for deceased Persons, form T4011(revised 2000). The guide is available on the internet at http://www.ccra-adrc.gc.ca/E/pub/tg/t4011eq/README.html or from any tax services office. It provides detailed information on the filing of tax returns and, in particular, includes information on the filing of separate income tax returns in some situations. By filing a separate return, it is often possible to reduce the total tax payable by an estate. You may wish to review the guide in order to determine the options that may be available to you in respect of your father's estate.

With respect to RRSPs and RRIFs, the last annuitant of the plan is generally considered to have received, immediately before death, an amount equal to the fair market value of the property held in the plan at the time of death. This amount must be reported as income in the annuitant's income tax return for the year of death. An offsetting deduction may then be available if all or a portion of the inclusion qualifies as a refund of premiums as defined in the Income Tax Act (the "Act"). Refunds of premiums may only be made to a spouse or common law partner of a deceased annuitant, or to a child or grandchild of the annuitant who was financially dependent on the annuitant at the time of death.

The surviving spouse of a deceased annuitant of an RRSP or RRIF may also become the annuitant of the plan at the time of death. In this event, the rules noted in the preceding paragraph will not apply, and the plan may continue to pay benefits to the surviving spouse. A surviving spouse will generally become the annuitant of a plan if the option was selected when the plan was established, or if the legal representative of the deceased annuitant and the surviving spouse make an election to have the surviving spouse become the annuitant. Legal counsel may be able to assist you in determining if it is possible to make such an election in your situation.

Subject to the two exceptions discussed below, generally, when a person dies the property owned by the deceased will form the deceased's estate until they are distributed to the beneficiaries of the estate. RRSPs and RRIFs will normally be included in the estate until they are paid out to beneficiaries, either in accordance with a beneficiary designation made in the plan itself or in accordance with a direction made in the deceased's will. Because the plans are part of the deceased's estate, any property held in the plans may be used to pay the debts of the deceased or of the estate including any income taxes owing. The estate of a deceased taxpayer will generally be responsible for the payment of the taxes assessed in the final return and as executrix you must be aware of your responsibilities in this regard. Please refer to page 8 of the guide for information concerning clearance certificates. In addition, you should be aware that section 160.2 of the Act provides that both the estate and the recipients of amounts paid out of the estate in respect of an RRSP or a RRIF, may be jointly and severally liable to pay all, or a portion of, the taxes payable because of the inclusion of the value of the RRSP or RRIF in the deceased annuitant's income in the year of death.

The first exception to the general statement in the first sentence of the previous paragraph may occur where an RRSP or RRIF is issued in the form of a life insurance contract. In this case, it may be possible for property held under the insurance contract to flow directly to the beneficiaries of the contract without forming part of the estate.

The second exception to the general statement noted above may occur where the property of the deceased was held jointly with another person, for example, in a joint tenancy. A joint tenancy is a form of ownership of property in which the joint tenants have concurrent ownership and possession of the same property. The interest of each joint tenant is identical and the property cannot be sold or mortgaged without the consent of both joint tenants. By operation of the law dealing with property held in joint tenancy, in the event of the death of one of the joint tenants, the property will belong solely to the surviving joint tenant. As the deceased joint tenant has no interest in the property on death, it does not form part of the deceased's estate and, it is not necessary for a grant of probate to be obtained. However, in our view, a true joint tenancy arrangement will not exist in some situations where beneficial ownership does not, in fact, change and the other joint tenants can reasonably be considered to act as agent for the beneficial owner in respect of all dealings with the property. For example, if an individual transferred property into a joint tenancy and the transfer only occurred for the purpose of reducing probate fees, then the joint tenancy would not be considered valid. The property would therefore be part of the deceased's estate on death and could be used to pay the deceased's liabilities.

To summarize, based on the information you provided, it would appear to us that your father's estate will be obligated to pay the taxes owing on the assessment of his final income tax return. Furthermore, the RRSP and RRIF owned by your father would seem to be part of your father's estate assuming they are not insured plans. Accordingly, the estate would be required to use the property of these plans to pay the taxes owing and if the proceeds of the plans are distributed to the beneficiaries of the plans, those beneficiaries could be jointly liable to pay the taxes owing. However, because the information you provided is incomplete you may wish to seek independent advise on these matters.

We trust that these comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch