Last weekend I attended the Canadian Bar Association, Wills and Estates section executive meeting in Toronto.
Most law affecting wills and estate is provincial, and our provincial laws can vary substantially from province to province. The variations make these meetings quite interesting. I learnt a great deal from other lawyers from across Canada about the laws of other provinces.
But the fact that so much of the law affecting our estate practices is provincial presents a challenge to a national section. The section needs to identify matters that transcend provincial differences.
I think that the national section executive does a very good job of addressing matters of national scope. (I am not a member of the executive, having attended the meeting as a representative the British Columbia sections.) The national section has identified a number of federal laws in need of reform.
One reform that the national section has pressed for a few years concerns taxation of Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). The Income Tax Act, Canada has provisions allowing tax of RRSPs and RRIFs to be deferred on death if the deceased annuitant has designated his or her spouse or common law spouse as the beneficiary of the plan. (I discussed the rules in more detail here.)
But the rules allowing for the deferral of tax do not allow someone to set up a trust for his or her spouse, instead of naming the spouse as the beneficiary. This is unfortunate. Let’s take a husband who is married for a second time. He has children from his first marriage. He may want to let his wife take funds out of his RRSPs after his death, but then provide that any RRSPs left on her death will go to his children. The way the tax law works, he has a choice. He can either leave them to his wife outright, in which case he will not have control over where any funds remaining in the RRSPs will go on her death. Or, he can let the RRSPs fall into his estate, and then provide that the proceeds will be held in trust for his wife during her lifetime, with what remains of the capital going to his children on his wife’s death. But if he chooses to have the proceeds held in a trust for his wife during her lifetime only, he will lose the ability to defer tax on the RRSPs after his death. Instead, he will be deemed to have cashed in the RRSPs at death, and his personal representative will have to pay tax on the RRSPs out of the estate. The tax may be substantial.
The national executive has been working toward a reform of the Income Tax Act to allow a deferral of tax on RRSPs and RRIFs if they are held in a spousal trust. The idea is that there would be restrictions that provide that only the spouse (including a common-law spouse) would be entitled to any of the RRSPs or RRIFs during his or her lifetime. Tax would be paid as the spouse receives withdraws from the RRSPs or RRIFs. Tax would also be paid on any funds remaining in the RRSPs or RRIFs on the spouse’s death.
Any reform to allow tax deferral on RRSPs and RRIFs held in a spousal trust would likely be revenue neutral to the government, while providing people with greater flexibility for their estate plans.