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The tax treatment of RRSPs on an annuitant’s death is something that often confuses (and perplexes) beneficiaries of an estate.  I’ve seen more than one situation where the residual beneficiaries of an estate are distressed to find out that the estate is picking up the tax bill for an RRSP being transferred to a named beneficiary…the argument being that they, as residual beneficiaries, should not have to pay taxes associated with funds be transferred to someone else. 

The general rule is that absent a tax-deferred rollover (more on that in a minute), the fair market value of the RRSP on the annuitant’s death is treated as income and must be included in the annuitant’s terminal return (tax return that is filed for the year of death). 

As noted above, there are a couple of situations where the taxes associated with an RRSP can be avoided by the estate.  The first is where the designated beneficiary is the annuitant’s spouse or common law partner; the other is where the beneficiary is the annuitant’s financially dependent child or grandchild.    

Where the beneficiary is a spouse and a physically/mentally infirm child or grandchild, the RRSP can be rolled-over to the beneficiary.  Where the beneficiary is a minor child or grandchild (who isn’t infirm) the proceeds of the RRSP can be used to purchase an annuity that will make payments annually until the minor has reached 18 (with such payments being taxed).  However, if the children/grandchildren are over 18 and not infirm no tax deferral will be available. 

It is worth noting that the tax liability the estate might incur is related only to the value of the RRSP on the annuitant’s death.  Once the recipient starts withdrawing funds, s/he will be liable for the tax, not the estate.

If you want to know more about the tax treatment of RRSPs on death, check out the Canada Revenue Agency’s memorandum on the issue. 

Have a great day!

Megan F. Connolly  

Tags: Beneficiary Designations, RRSPs/Insurance Policies An Annuity by Will Posted on January 27, 2009 by Hull & Hull LLP Email This
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Annuities are often employed when an individual plans his or her estate. We have covered different aspects of annuities on past blogs on Hull on Estates.

A testator, for example, may choose to have one child’s portion of the future estate placed into an annuity that will create a flow of money over time. The child would have access to the cash flow, but not necessarily access to the principal amount. 

In September 2008, Gayle Reid applied to the Superior Court of Justice for an interpretation.  The claimant’s father, Bernard Wiesberg, died and left an annuity to his friend, Avonne Richter (also identified as his common-law spouse). Minimum annual payments of the annuity were directed in the Will to Ms. Richter who received them from 2003 through to 2007. 

The Applicant was to receive the residue of her father’s estate.  A 2005 Order by Dandie  J.  required Ms. Richter to designate Ms. Reid as the beneficiary.  (A provision of the Income Tax Act required the beneficiary to be named, otherwise the retirement income fund would have collapsed, defeating the testator's intent.)

The issue arose when Ms. Richter, who received the previous annual annuity payments in arrears up to 2006, chose to take the $17,015.57 payment in January, in advance for that year. Ms. Richter died on April 17, 2007.

The Applicant sought an interpretation of her father’s Will, specifically regarding the annual payments. As the payments were for the “lifetime” of Ms. Richter, the Estate owed $12,027.44 to the Applicant because the Court reasoned that calculations must be made to the date of Ms. Richter’s death. Therefore a pro-rata calculation was “the only reasonable and fair manner to ensure the two gifts in the Will are honoured.”

If the annuity had been paid in arrears that December, Ms. Richter’s Estate would have been owed a pro-rata amount of the annuity for that year calculated to the date of her death.

Have a good day.

Jonathan

Tags: Beneficiary Designations, Common Law Spouses, Estate Planning, Hull on Es

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