skip to Main Content

Do the Designated Beneficiaries of the RRSP Pay The Tax?

Mediating estate disputes often involves determining who gets proceeds from the deceased’s registered retirement savings plan or registered retirement income fund (“RRSP/RRIF”), and who pays the taxes on that RRSP/RRIF. A key factor during the negotiations at mediation is how a judge would decide this issue were the matter to come before a court. In other words, what does the law say?

The general rule is that whoever is designated as the RRSP’s/RRIF’s beneficiary receives the proceeds, but the Estate pays the tax on the RRSP/RRIF. The question is whether this general rule on taxation is flexible.  Is there a situation in which a mediating party can make the case that a court would have ordered that the beneficiary of the RRSP/RRIF pay the entire tax owing on the RRSP/RRIF as opposed to the Estate? There is case law to suggest that can happen.

Take, for example, the issue that was before the Alberta Court of Queen’s Bench in Morrison v. Morrison1 The deceased, John, had designated one of his sons as the beneficiary of his RRIF, the effect being that when John died, the entire proceeds of the RRIF would circumvent his estate and pass directly to his son. Shortly before he died, John also sold his property and gave each of his children $25,000 from the proceeds. In his Will, John provided a specific bequest of $11,000 to be divided amongst his 11 grandchildren. When John died, however, there was not enough to pay that $11,000 bequest because his estate was liable to pay the entire tax owing on the RRIF.

The issues before the court in Morrison included whether the Estate was entitled to the proceeds of the RRIF by way of resulting trust, and whether the Estate or the son was liable to pay the income tax on the RRIF.

Before we get to the conclusion in Morrison, let’s briefly discuss the transfer of RRSPs/RRIFs.

Overview of RRSPs/RRIFs

An RRSP is a retirement savings plan you establish to which you or your spouse or common-law partner contribute funds. RRSPs are tax efficient, as your contributions can be used to reduce your income tax owing. This is because any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. The catch is that you generally have to pay tax when you receive payments from the plan.2 Because you are often retired when you start drawing from the funds, your marginal tax bracket will often be lower, meaning that the total income tax owing will be less by the time you take out funds.

Typically when you retire, you transfer some or all of your proceeds from your RRSP to a RRIF, which is an arrangement between you and your carrier (insurance company, trust company, or bank). Earnings in a RRIF are tax-free and amounts paid out of a RRIF are taxable on receipt.3

Section 53 of the Succession Law Reform Act provides that RRSPs/RRIFs are transferred directly to their named beneficiary on the plan holder’s death and do not form part of the plan holder’s estate.4 However, section 146(8.8) of the Income Tax Act provides that deceased people holding a RRSP/RRIF are deemed to have received the proceeds from that RRSP/RRIF immediately prior to their death.

The consequence of s. 146(8.8) of the ITA is that the CRA attributes the taxes owing on the RRSP to be payable by the Estate at first instance, not the beneficiary of the RRSP. This is consistent with the CRA’s publication “RC4177(E) Rev. 23 – Death of an RRSP Annuitant”, which provides that, as a general rule, a beneficiary will not have to pay tax on any amount paid out of the RRSP if it can be reasonably regarded as having been included in the annuitant’s income. Because the CRA considers an annuitant to receive the fair market value of the unmatured RRSP immediately prior to death, it follows that the Estate of the annuitant will pay the tax on the RRSP, not the beneficiary.5

However, there are clear exceptions to this rule. If the spouse or common-law partner is designated in the RRSP contract or the deceased’s annuitant Will as the sole beneficiary of the RRSP, and by a certain period all the RRSP property is directly transferred to an RRSP or other specified fund (for the full details of the condition see here), then the spouse or common-law partner would receive the T4RSP slip.6

Further, to the extent that there are amounts paid from the RRSP that constitute income earned in the RRSP after the date that the annuitant died, those amounts have to be reported by the beneficiaries designated in the RRSP contract or the deceased annuitant’s Will.7

It is also important to note that the CRA’s direction does not preclude it from ultimately seeking payment of the tax liability owing on the RRSP from the designated beneficiary.

Section 160.2(1) and (2) of the ITA is an enforcement mechanism that declares the recipient of the RRSP/RRIF proceeds jointly and severally liable with the deceased’s estate for the taxes arising from that deemed disposition.8 The estate must first be assessed for the tax on the benefits from the RRIF/RRSP in order that the amount of tax payable under the joint liability provisions may be determined.9 However, the Minister of Revenue is under no obligation to try to collect against the Estate first, and may instead seek collection against the beneficiary of the RRSP proceeds.10

The application of 160.2(1) and (2) of the ITA was not applicable in Morrison, as there were sufficient funds in the Estate to pay the RRIF, with the exception that a $11,000 bequest would have to be adeemed. However, there is an established priority for the payment of debts and expenses, and if the residue of the Estate was not sufficient to pay those taxes owing, then the $11,000 as a general bequest would be applied to pay the taxes, after which the $25,000 specific bequests would be abated.11 This analysis contradicts the court’s finding that the Estate was under no legal obligation to pay the tax owing on the RRIF.12

The Case of Morrison

The court in Morrison was tasked with considering whether the son held the RRIF in trust for the Estate, and if not, whether the son was required to reimburse the Estate for the taxes owing on the RRIF.

Did the Son Hold the RRIF Proceeds in Trust for the Estate?

Part of the court’s analysis included a discussion as to whether the ruling in Pecore v. Pecore,13 which found a presumption that adult children held joint assets in trust for their parents by way of resulting trust, imposes a similar presumption of a resulting trust with respect to the RRIF. While the court ultimately and hesitantly found that a presumption of a resulting trust existed, the court ultimately determined that applying the presumption was unnecessary since it could make a finding on the evidence without resorting to presumptions.14

It should be noted that Ontario courts are currently grappling with the issue as to whether a presumption of a resulting trust exists with respect to RRIFs/RRSPs. In Calmusky v. Calmusky, 2020 ONSC 1506, the Superior Court of Justice found that the doctrine of resulting trust applied to a RRIF beneficiary designation. However, in the most recent Mak (Estate) v. Mak, the Superior Court of Justice refused to follow the Calmusky decision and found that the resulting trust doctrine does not apply to beneficiary designations. In making this finding, the court recognized that Calmusky has since been criticized for applying the Pecoredecision to RRIFs and RRSPs, as Pecore dealt with inter vivos transfers of property and was written in the context of determining whether a presumption of advance between parents and adult children should remain good law. Unlike Pecore, the issues of RRIFs/RRSPs are more similar to testamentary dispositions in a Will, and involve directly designating a beneficiary as opposed to the property transferring through right of survivorship.15 As such, while the court in Morrison found that it needn’t apply the presumption of a resulting trust on the RRIF/RRSP proceeds, its finding that a presumption of a resulting trust existed is inconsistent with Ontario’s recent Mak decision that no presumption exists.

So what was the conclusion in Morrison? While the court ultimately found the existence of a presumption of a resulting trust, the court also found that, upon considering the evidence, the son had established, on a balance of probabilities, that the Deceased intended to give his son the RRIF proceeds.16

In making this finding, the court considered the close relationship between the son and his father at the time of the beneficiary designation, the son’s assistance to his father around the time of the Deceased’s death, and the close connection between the Deceased making the Will and the signing of the beneficiary designation in favour of the son only.

Who pays the Income Tax on the RRIF?

The next question in Morrison was who should pay the tax on the RRIF. Surprisingly, the court ultimately determined that, based on the evidence, and on a balance of probabilities, the Deceased did not intend that his estate pay the tax owing on the RRIF, and that the son should be liable for the tax paid for the RRIF.

In making this finding, the court recognized that it would be impossible to go into the Deceased’s mind and determine his understanding of the tax consequences of designating a non-spouse as a beneficiary of the RRIF, and that the only evidence the court had in this regard was the fact that the Deceased made distributions of $25,000 to each of his children following the sale of his property, and that were the Estate not to be liable for the tax on the RRIF, there would be just enough to create the $11,000 specified to be divided among his grandchildren.17 The court found that if the Deceased had been aware that his estate would be taxed for the RRIF, then it is unlikely he would have given as much as he did to his children out of the sale proceeds of his house, as there would be insufficient funds to pay the $11,000 specific bequest to his grandchildren once the taxes owing on the RRIF were paid.18

The court applied s. 8 of the Judicature Act, RSA 2000 c J-2 to impose a remedy where the son would be required to reimburse the Estate for the taxes paid for the RRIF.19

Analysis of Morrison

It is questionable as to whether Morrison would be followed in Ontario. The court provided two justifications for why the son should be required to pay the tax on the RRIF.

With respect to the first justification, the court held that the son was unjustly enriched by not having to pay the tax on the RRIF.20 This conclusion required a finding that there was a lack of juristic reason for the enrichment. However, s. 146(8.8) of the ITA provides that the proceeds of a RRIF/RRSP are brought into the income of the plan holder, not the beneficiary, and are therefore taxed against the Estate. This is consistent with the CRA’s direction that as a general rule, a beneficiary will not have to pay tax on any amount paid out of the RRIF/RRSP if it can be reasonably regarded as having been included in the annuitant’s income.21

It is therefore unclear why the court did not find that the provisions of the ITA and the guidance from the CRA were not sufficient juristic reasons to have the Estate pay the tax owing on the RRIF. This is also consistent with John D. McCamus’s statement in The Law of Restitution, that “… the payment of validly imposed taxes may be considered unjust by some, but their payment gives rise to no restitutionary right of recovery”.22

The second justification in Morrison for why the beneficiary had to pay the tax may also be flawed. The court reasoned that the Deceased made a mistake about the tax consequences of making a beneficiary designation, and that equitable principles surrounding the mistake justifies an order that the son reimburse the Estate for the taxes attributed to the RRIF.23

However, because the tax liability was not a “payment” to the son, then it is awkward to frame this as a “mistaken payment”. Rather, it appears to be more akin to an unintended benefit provided, in which case the court would still likely have had to resort to an analysis as to whether the son was unjustly enriched. Again, a finding of a lack of juristic reason would be difficult, given the CRA’s guidance that the Estate will pay the tax owing on the RRSP/RRIF.

It also appears that the evidence relied on in coming to this finding was lacking. It is noteworthy that the court declined to rectify the Will to require that the son reimburse the Estate for the RRIF tax, because that finding would arguably require “clear and convincing” evidence as opposed to just a balance of probabilities.24 The court, knowing that the “clear and convincing” evidence was not attainable, instead relied on the fact that the Estate could not afford the RRIF tax and the specific bequest to infer a mistake.

Even were there clear and convincing evidence, rectification of a Will may not be available to correct unforeseen tax consequences owing against the Estate. In Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, the Supreme Court of Canada found that, in cases of contractual interpretation, unforeseen tax consequences stemming from a commercial agreement do not provide one of the contracting parties with an equitable right to rectify the agreement to make it more tax-advantageous.25 While designating a beneficiary in a RRIF/RRSP is not the same as entering into a contractual agreement, the Supreme Court’s finding in Fairmont Hotels casts doubt on whether a court dealing with a situation like the one in Morrison could rectify a Will simply because of unintended tax consequences and not because of unintended dispositions of estate assets.

Conclusion

Remember that a mediation allows the parties to craft their own solution.  So even if the estate is ordinarily expected to pay the taxes on the RRSP/RRIF upon the demise of the annuitant, the parties can agree that the beneficiary will pay the tax.

However, to persuade the settling parties that the designated beneficiary should pay the tax on the RRSP/RRIF, you will need to put forward a convincing legal argument in your mediation brief. On that note, Morrison is a helpful arrow in your quiver if you want to insist that the designated beneficiary of the RRSP/RRIF pay the entire tax owing. It is likely that you would need to present evidence to suggest that the deceased always intended the designated beneficiary to pay the tax on the RRSP/RRIF, and to the extent it’s applicable, you might point to other estate gifts that would be compromised were the Estate required to pay the RRSP’s/RRIF’s tax.

Generally speaking, failing to get tax advice prior to mediating your estate dispute is ill advised. It’s always prudent, when preparing for the mediation, for a tax professional to review how the structuring of a settlement can be tweaked so that more money goes to the litigants and less money goes to CRA.  Knowing the tax issues and incorporating that into the strategy of mediation is important and could save you a lot of money.

One final comment.  This blog is not meant as tax or legal advice and should not be relied on as such.  If the reader needs guidance on tax and legal matters, nothing replaces consulting a qualified tax lawyer or other tax professional to provide proper guidance.

 

Footnotes
  1.   Morrison v. Morrison, 2015 ABQB 769.
     
  2.   Canada Revenue Agency, “Registered Retirement Savings Plan (RRSP)”, available online.
     
  3.   Canada Revenue Agency, “Registered Retirement Income Fund (RRIF)”, available online.
     
  4.   Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 53; Amherst Crane Rentals Ltd. v. Perring, (2004) O.J. No. 2558 (C.A.), paras. 11-18.
     
  5.   Canada Revenue Agency, “RC4177(E) Rev. 23 – Death of an RRSP Annuitant”, available online.
     
  6.   Canada Revenue Agency, “RC4177(E) Rev. 23 – Death of an RRSP Annuitant”, available online.
     
  7.   Canada Revenue Agency, “RC4177(E) Rev. 23 – Death of an RRSP Annuitant”, available online.
     
  8.   ITA, s. 160.2(1), (2).
     
  9.   Belange v. R, 2007 TTC 502 at para. 13.
     
  10.   O’Callaghan v. R., 2016 TCC 169 at para. 26.
     
  11.   Legge Estate, Re, 2001 NSSC 156 at para. 21.
     
  12.   Morrison v. Morrison, 2015 ABQB 769 at para. 105.
     
  13.   Pecore v. Pecore, (2007) 1 S.C.R. 795, 2007 SCC 17.
     
  14.   Morrison v. Morrison, 2015 ABQB 769 at para. 67.
     
  15.   Mak(Estate) v. Mak, 2021 ONSC 4415 at paras. 44-46.
     
  16.   Morrison v. Morrison, 2015 ABQB 769 at para. 73.
     
  17.   Morrison v. Morrison, 2015 ABQB 769 at paras. 77-79.
     
  18.   Morrison v. Morrison, 2015 ABQB 769 at para. 79-80.
     
  19.   Morrison v. Morrison, 2015 ABQB 769 at para. 98-110.
     
  20.   Morrison v. Morrison, 2015 ABQB 769 at para. 105-106
     
  21.   Canada Revenue Agency, “RC4177(E) Rev. 23 – Death of an RRSP Annuitant”, available online.
     
  22.   2004, Maddaugh and McCamus, The Law of Restitution p. 3-28.
     
  23.    Morrison v. Morrison, 2015 ABQB 769 at para. 107.
     
  24.   Morrison v. Morrison, 2015 ABQB 769 at para. 93.
     
  25.    Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 at para. 24.
     

The author of this blog is Peter Neufeld. Peter is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate and commercial litigation.

Related Posts and Articles
This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
Back To Top