Alberta Court Orders Beneficiary of Registered Retirement Income Fund to Bear the Tax Burden on the Annuitant's Death

When the annuitant of an Registered Retirement Savings Plan or Registered Retirement Income Fund dies, taxes in respect of either type of  registered plan are generally borne by the deceased’s estate, rather than by the beneficiary of the registered plan. There are some exceptions, including significantly the ability to defer taxation if the proceeds are paid to the annuitant’s spouse (I have written about the taxation of registered plans in greater depth in a previous post). The tax rules may create unintended consequences when the annuitant names a beneficiary of the registered plan. If the proceeds of the registered plan are large, the effect may be to significantly deplete the deceased annuitant’s estate, thereby reducing the amount available to the beneficiaries of his or her will. If the annuitant is well advised, he or she may take the taxation into account when naming a beneficiary of a registered plan, but I suspect that all too often, the annuitant may not be aware of the impact of tax.

Mr. Justice Graesser of the Alberta Court of Queen’s Bench dealt with this issue in a unique way in a Morrison v. Morrison, 2015 ABQB 769. In a previous post, I wrote about his reasons for judgment in this case on the issue of whether the designated beneficiary of a Registered Retirement Income Fund was entitled to retain the proceeds or whether he held them in trust for his father, the annuitant’s estate.

I will repeat some of the key facts from my previous post, and add a few more relevant to this issue.

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. Before his death, John Morrison sold his house, and distributed $25,000 to each of his children from the sale proceeds. John Morrison also designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund.  

If John Morrison intended that his son Douglas Morrison was entitled to the proceeds of the Registered Retirement Income Fund, and Mr Justice Graesser found on the evidence that he did, and if the estate bears the tax in respect of the proceeds, the estate would be depleted to the point where there would be insufficient funds from Robert Morrison’s one-quarter share of the estate to pay $11,000 to John Morrison’s grandchildren.

There was no direct evidence of whether John Morrison understood that the way the income tax provisions work, the tax on the Registered Retirement Income Fund proceeds is borne by the estate, but Mr. Justice Graesser inferred that he likely did not. If he did not, it would be unfair for Douglas Morrison to receive the benefit of the proceeds, without bearing the full burden of the taxes. Mr. Justice Graesser wrote:

[76]           However, the matter does not end there. There is the question of the tax paid on the RRIF. It is manifestly unfair that the Estate bear the burden of the tax while Douglas enjoys the benefit of the RRIF.

[77]           It is impossible to go into Mr. Morrison’s brain and determine his understanding of the implications to his estate of designating a non-spouse as beneficiary of the RRIF. That results in a tax liability to the estate, leaving the estate to pay the tax on the RRIF from its other assets. In this case, the tax on the RRIF has denuded the Estate to such an extent that it is unable to pay all of the specific bequests.

[78]           The only evidence I have of any understanding on Mr. Morrison’s part is in relation to the sale of his home, shortly before his death. None of the children suggest that he was in any way confused or lacking capacity at the time of the sale or the distribution of $25,000 to each of them.

[79]           In the absence of the tax on the RRIF being paid out of his estate, there was just enough left in his estate (after payment of debts and expenses) to create the $11,000 specified to be divided among his grandchildren.

[80]           It would seem highly unlikely that Mr. Morrison, by giving each of his children $25,000, intended to leave insufficient funds in his estate to satisfy the bequests to his grandchildren. That suggests to me, and I draw the inference, that Mr. Morrison was unaware of the tax consequences of designating his son as a beneficiary. He must have been under the impression or understanding that Douglas would bear any tax liability on the RRIF and no burden would fall on his estate.

[81]           This is another area that should be of particular concern to the investment community. I wonder how many investment advisors who give advice concerning beneficiary designations are aware of the tax consequences of the designation?

[82]           If Mr. Morrison had been aware that the RRIF would be taxable in his estate’s hands, it is unlikely that he would have given as much as he did to his children out of the sale proceeds of his house. If he had been aware of those consequences, I infer that he would have changed his will or changed the designation making the designation conditional on Douglas paying the tax.

[83]           I draw the inference and find on a balance of probabilities that whatever motivated Mr. Morrison to designate Douglas as beneficiary for the RRIF, he did not intend Douglas to be the beneficiary of the tax payable by his estate on the RRIF.

[84]           I thus find that Mr. Morrison either intended Douglas to be responsible for the tax on the RRIF and expected that the tax would be deducted from the RRIF when it was transferred or paid to Douglas, rather than left to be paid by the Estate, or that Mr. Morrison was mistaken about the tax treatment of his RRIF having designated Douglas as beneficiary based on the above intention and expectation.

[85]           In either circumstance, Douglas has received an unintended and unexpected benefit from the Estate.

Mr. Justice Graesser held that in these circumstances he had jurisdiction to provide a remedy to the unfairness of the tax falling on the estate based on equitable principles. He wrote at paragraphs 98 and 99:

[98]           The alternative approach, and the one which I adopt in this case, is to apply s 8 of the Judicature Act, RSA 2000 c J-2. That section provides:

(8)        The Court in the exercise of its jurisdiction in every proceeding pending before it has power to grant and shall grant, either absolutely or on any reasonable terms and conditions that seem just to the Court, all remedies whatsoever to which any of the parties to the proceeding may appear to be entitled in respect of any and every legal or equitable claim properly brought forward by them in the proceeding, so that as far as possible all matters in controversy between the parties can be completely determined and all multiplicity of legal proceedings concerning those matters avoided.

[99]           The application of s 8 entitles me to fashion a remedy with the effect that Douglas reimburse the Estate the full amount of the tax paid by the Estate on the RRIF. I have found that Mr. Morrison did not intend Douglas to receive the RRIF and leave the tax burden on his Estate. Tax was to follow the RRIF.

Mr. Justice Graesser found that Douglas Morrison would be unjustly enriched if he were not required to bear the tax burden, or alternatively that he should bear the tax based on misstate. He imposed a constructive trust on the proceeds of the Registered Retirement Income Fund to the extent of the estate’s liability for taxes in respect of those proceeds.

[104]      Probate law’s origins are in equity, so I do not find it inappropriate to consider equitable remedies where the common law is inadequate to remedy a wrong.

[105]      In these circumstances, I find that the tax paid by the Estate conferred a benefit in that same amount to Douglas. He has been unjustly enriched by the payment. While the Estate was under a legal obligation to pay the tax, it was under no legal obligation to Douglas to pay it for him.

[106]      It would be unjust for Douglas to retain the benefit. Principles of unjust enrichment justify a direction that Douglas reimburse the Estate for the tax it paid on his behalf.

[107]      An alternative approach using equitable principles and remedies is that the tax paid by the Estate resulted from Mr. Morrison’s mistaken understanding of the consequences of the beneficiary designation. Reimbursement by Douglas flows from equitable principles surrounding mistake.

[108]      Either approach results in a declaration of a constructive trust on the proceeds of the RRIF received by Douglas to the extent of the Estate’s payment to CRA on account of the RRIF.

[109]      Requiring reimbursement by Douglas will replenish the Estate to the amount intended by Mr. Morrison to be available for distribution, and prevents the manifest injustice of having an unintended tax consequence of a beneficiary designation frustrate the testator’s intentions.

[110]      I recognize that the approach I have taken here may be viewed as extraordinary. But that is what s 8 is for: creating an equitable remedy where the law would otherwise leave the injured party (here, the Estate and beneficiaries other than Douglas) with no adequate remedy.

Although this decision is not binding on British Columbia courts, the Supreme Court of British Columbia might find the reasoning persuasive if the Court infers from the facts that the annuitant did not recognize the tax consequences of naming a beneficiary to his or her registered plan. The British Columbia Law and Equity Act has a similar provision to section 8 of the Alberta Judicature Act. Secion 10 of the Law and Equity Act says:

Avoidance of multiplicity of proceedings

10  In the exercise of its jurisdiction in a cause or matter before it, the court must grant, either absolutely or on reasonable conditions that to it seem just, all remedies that any of the parties may appear to be entitled to in respect of any legal or equitable claim properly brought forward by them in the cause or matter so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of legal proceedings concerning any of those matters may be avoided.

Should the Presumption of Resulting Trust Apply to Beneficiary Designations in Benefit Plans?

The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended....

This quote is taken from the Supreme Court of Canada decision in Pecore v. Pecore, 2007 SCC 17 at paragraph 24.

The presumption of resulting trust is most often applied to transfers of wealth that occur during the lifetime of the transferor. For example, a mother might gratuitously transfer the title to real estate to her daughter or perhaps into a joint tenancy with her daughter. In such circumstances, there is a presumption that the daughter holds the real estate in trust for her mother, and after her mother’s death, for her mother’s estate.  But the court may find that the mother intended to make a gift of the real estate or an interest in it to her daughter, in which case the presumption is rebutted and the daughter is entitled to keep her interest in the real estate.

As I have written before, the Supreme Court of British Columbia has held that the presumption of resulting trust also applies to the proceeds of a Registered Retirement Income Fund following the death of the annuitant. In Neufeld v. Neufeld, 2004 BCSC 25, the Supreme Court of British Columbia applied the presumption of resulting trust to hold that the annuitant’s brother held the proceeds in trust for her estate.

In a decision of the Alberta Court of Queen’s Bench released last month, Mr. Justice Graesser questioned, without deciding, whether the presumption should properly be applied to designated beneficiaries of Registered Retirement Income Funds and other plans under which the annuitant or owner may appoint a beneficiary on death. The case is Morrison Estate, 2015 ABQB 769 (Canlii).

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. John Morrison designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund. As I will discuss in another post on this case, the usual rule is that the taxes on the Registered Retirement Income Fund on death comes out of the estate, which in this case would significantly deplete the estate.

One of John Morrison’s other children, Cameron Morrison, asked the Court to apply the presumption of resulting trust to the beneficiary designation, and declare that Douglas Morrison holds the proceeds of the Registered Retirement Income Fund in trust for their father’s estate to be distributed in accordance with the will.

In considering whether the presumption of resulting trust applies to a beneficiary designation in Alberta, Mr. Justice Graesser set out the problem as follows:

[18]           The results of this application could have significant impact on the investment and brokerage industry. There are undoubtedly millions of RRSPs, RRIFs and life insurance policies that have designated beneficiaries instead of the proceeds going to the owner’s estate.

[19]           I suspect that many owners, as well as many investment advisors and brokers, are unaware of the potential consequences of the Supreme Court’s decision in Pecore as it relates to beneficiary designations, as well as the income tax consequences of an RRIF or RRSP beneficiary being someone other than the owner’s spouse.

[20]           There has always been the potential issue of a resulting trust being imposed in the event of a gratuitous and unexplained beneficiary designation. Until Pecore, the presumption of advancement in favour of children generally prevented the potential application of resulting trusts in most family situations.

[21]           Since the decision in Pecore, however, there is the potential that any non-spousal designated beneficiary (whether under an RRSP, RRIF or life insurance policy) will be deemed to hold proceeds in trust for the donor’s estate unless he or she can prove that a gift was intended.

[22]           It is frequently said that hard cases make bad law, and there is certainly the potential for a hard case such as this to impact many other plan or policy owners and their designated beneficiaries.

Mr. Justice Graesser expressed doubt as to whether the presumption should be applied to designations of beneficiaries of benefit plans, reasoning that designating a beneficiary is more like a will, taking effect on death, and designations can usually be changed before death. This stands in contrast to gratuitous transfers that may confer an immediate property right on the transferee.

He wrote as follows:

[44]           Like designations of beneficiaries under insurance policies, there is a benefit to the owner of an RRSP or RRIF to be able to designate a beneficiary rather than have the plan go to his or her estate. That may be tax roll-over provisions relating to spousal beneficiaries and there may be an element of creditor-proofing if there is designated beneficiary rather than having the plan go to the owner’s estate.

[45]           I can frankly think of no sound policy reason why beneficiary designations under RRSPs, RRIFs and insurance policies should not be treated in a similar fashion to beneficiary designations under a will. None of these “gifts” take effect until the death of the owner of the plan or policy. With the exception of irrevocable beneficiaries under some life insurance policies, the owner is free to change beneficiaries during his or her lifetime, so long as he or she is of sound mind.

[46]           I recognize the historical concerns surrounding the formalities required of testamentary dispositions. The intent of formality was undoubtedly to attempt to add a level of assurance that the donor intended the consequences of his actions and was in fact the author of the testamentary disposition.

[47]           While such designations have been treated as inter vivos transactions and not testamentary transactions, they are certainly much closer to testamentary transactions than to inter vivos gifts such as transferring bank accounts, investment accounts or property into joint names. Such transactions cannot be unilaterally undone, unlike beneficiary designations. I note that RRSP beneficiary designations appear to be “testamentary dispositions” in Ontario as a result of Ontario’s Succession Law Reform Act, RSO 1990, c S.26 (see Amherst Crane Rentals v Perring, 2004 CanLII 18104 (ON CA), 2004 CanLII 18104 (ONCA)).

[48]           It may well be arguable that Alberta’s Wills and Succession Act accomplishes the same thing in s 71. I need not make that finding because of my ultimate conclusion.

[49]           Beneficiary designations are unlike joint ownership of bank accounts or investment accounts, which confer a present property interest. Beneficiary designations do not. Beneficiary designations are essentially powers of appointment conferred on the owner by the terms of the contract.

[50]           If there was some expectation that requiring formalities would ensure that the testator obtained appropriate advice before completing a will or codicil, that is entirely undone by the law respecting holograph wills.

[51]           I ask rhetorically, if a few handwritten notes on the back of a cigarette package signed by the testator is a valid testamentary instrument and not subject to the law relating to resulting trusts, why should a beneficiary designation signed and witnessed (presumably by a knowledgeable investment advisor) be treated differently?

[52]           This may be one of the unintended consequences of Pecore v Pecore and the abolition of the presumption of advancement in favour of able, adult children. I suspect, without knowing, that the vast majority of beneficiary designations under RRSPs, RRIFs and life insurance policies are spouses or adult interdependent partners or children.

[53]           In my view, Pecore and Kerr v Baranow should not be applied to beneficiary designations for RRIFs (and by inference RRSPs and life insurance policies). To apply Kerr v Baranow and Pecore v Pecore to RRSP, RRIF or life insurance beneficiary designations would, in my view, create untold uncertainties in what are likely hundreds of thousands if not millions of beneficiary designations in Canada.

Mr. Justice Graesser did not ultimate decide whether the presumption of resulting trust applies to the designation of a beneficiary designation in Alberta. He found sufficient evidence that John Morrison intended that Douglas Morrison keep the proceeds of the Registered Retirement Income Fund to rule in Douglas Morrison’s favour on this issue. He wrote:

[73]           On the evidence before me, I find that Douglas has established on a balance of probabilities that his father intended to give him the RRIF. I make that finding on the basis of several factors:

1)         The close relationship between Douglas and his father that existed at the time of the beneficiary designation;
2)         The assistance rendered to Mr. Morrison by Douglas in the time surrounding and immediately following Mrs. Morrison’s death; and
3)         The close temporal connection between the making of the will appointing Douglas and Heather joint alternate executors and the signing of the beneficiary designation in favour of Douglas only.

[74]           I recognize that this is a very thin finding. However, the balance of probabilities tips at 50.01%. In this case, there is slightly more evidence of an intention to favour Douglas than to have Douglas hold the RRIF as a resulting trust for the estate or his siblings.

[75]           Thus, Douglas is entitled to the RRIF.

Even if Justice Graesser had held that the presumption of resulting trust does not apply to a beneficiary designation, a decision of the Alberta Court of Queen’s Bench is not binding on British Columbia courts. In British Columbia, the only case I am aware of on point is the Neufeld decision which does apply the presumption of resulting trust to a beneficiary designation. But if this issue comes before the British Columbia Court of Appeal in the future, the Court could find Mr. Justice Graesser’s analysis persuasive. 

Beneficiary Designations of Benefit Plans Under the New Wills, Estates and Succession Act

The new Wills, Estates and Succession Act (“WESA”), which will come into force on March 31, 2014, brings much of British Columbia’s legislation related to succession under one Act. Although much of WESA deals specifically with wills and estate administration, it also has provisions related to other estate planning, including designations of beneficiaries in various benefit plans.

Part 5 of WESA covers designations of beneficiaries of benefit plans. These are defined in the legislation, and include pension plans, registered retirement savings plans, registered retirement income funds, annuities and tax free savings accounts. But significantly, Part 5 does not apply to contracts of insurance and insurance beneficiary designations that are governed by the Insurance Act. We don’t quite have one-stop shopping for our succession legislation.

Here are a few of the highlights:

1.   A participant in a benefit plan may designate a beneficiary on death, or alter or revoke a designation. It must be in writing. It cannot alter or revoke an irrevocable designation. It must be “signed by the person making it, or by another person in the presence of the person making it and by his or her direction and the signature may be in the name of the person making it or the person signing.” It should be noted that the beneficiary designation does not require the same witnessing formalities as a will.

2.   You will be able to make a beneficiary designation of a benefit plan in your will, but the designation must expressly relate to the plan. If you do make a designation in the will, you may later change the designation without having to make a new will, if the change meets the requirements set out above. It is possible to make a valid beneficiary designation of a benefit plan in a will even though the will itself is not valid as a will, for example if the will-maker signs the will, but does not have it properly witnessed.

3.   Section 82 will allow you to appoint a trustee for a beneficiary of a benefit plan. This can be quite important. For example, if you wish to provide for someone with a disability who cannot manage his or her own money, you can create a trust for that beneficiary. There was (and is until WESA comes into force) some uncertainty about whether you could designate a trustee as a beneficiary of some plans, such as RRSPs. My view was that you could, but some financial institutions disagreed, and the law will now be clearer.

4.   If the participant in a benefit plan becomes incapable of managing his own affairs, there is a provision that would allow a nominee, which includes an attorney acting under and enduring power of attorney, and a committee appointed under the Patients Property Act, to make a new designation of the same beneficiary of a plan. This would be useful if, for example, funds are moved from one Registered Retirement Savings Plan to another. The attorney or committee could designate the same beneficiary the participant had designated in the previous plan.

5.   There is also a broader provision, section 85(3) that will allow an attorney acting under an enduring power of attorney or a committee, to make a designation appointing or changing a beneficiary of a benefit plan, but only if authorized to do so by the court. Accordingly, if the participant in a plan had never designated a beneficiary of say his or her RRSP, the attorney would have to apply to court for authorization to make a designation.

Changes to Power of Attorney Act Will Provide Limited Power to Appoint Beneficiaries

Changes to the British Columbia Power of Attorney Act that come into effect on September 1, 2011, will clarify the authority of an attorney appointed under an enduring power of attorney to designate beneficiaries for the person for whom the attorney is acting.

If the person who made the enduring power of attorney becomes incapable of making his or her own decisions, the attorney may manage the incapacitated person’s affairs. The attorney may contemplate making or changing a beneficiary of a pension plan, Registered Retirement Savings Plan, Tax Free Savings Account, or insurance policy.Can the attorney do so?

Section 20 of the Power of Attorney Act will provide a limited power for an attorney under a power of attorney to make a beneficiary designation. Section 20 (5) provides:

(5) An attorney may, in an instrument other than a will,

(a) change a beneficiary designation made by the adult, if the court authorizes the change, or

(b) create a new beneficiary designation, if the designation is made in
(i) an instrument that is renewing, replacing or converting a similar instrument made by the adult, while capable, and the newly designated beneficiary is the same beneficiary that was designated in the similar instrument, or
(ii) a new instrument that is not renewing, replacing or converting a similar instrument made by the adult, while capable, and the newly designated beneficiary is the adult's estate.

I stress the limited nature of the power. Essentially, this provision allows an attorney to maintain the same beneficiaries as those appointed by the person for whom the attorney is acting. For example, if the person who appointed the attorney had a Registered Retirement Savings Plan with a designated beneficiary, and the attorney transfers the funds to a different plan, the attorney may designate the same beneficiary. But if the attorney wishes to change the beneficiary, he or she must first apply for authorization from the Supreme Court of British Columbia.

If there is no named beneficiary, then the attorney may designate the estate of the person for whom the attorney is acting, in which case the asset will ultimately be distributed to the beneficiaries of that person's will.

The Power of Attorney Act will also contain an express provision in section 21 that the attorney may not make or change a will on behalf of the person for whom he or she is acting.

Federal Budget Allows Rollovers from RRSPs to RDSPs

Today's Canadian Federal Budget has a proposal to allow for income tax to be deferred on the death of a Registered Retirement Savings Plan annuitant if the funds are paid to Registered Disability Savings Plan for the annuitant's financially dependant child or grandchild. The measure is explained in the Budget here as follows:

When the annuitant under a Registered Retirement Savings Plan (RRSP) dies, the existing income tax rules generally provide that the value of the RRSP is included in computing the deceased's income for the year of death. However, preferential tax treatment is provided on RRSP distributions made after death to the deceased's surviving spouse or common-law partner, or to children or grandchildren who were financially dependent on the deceased RRSP annuitant. There are two aspects to this preferential tax treatment.

•Distributions of the RRSP proceeds to the deceased's surviving spouse or common-law partner, or to a financially dependent child or grandchild, reduce the amount of the deceased's income and are included in the income of the recipient (these distributions are referred to as "refunds of premiums").
•If a spouse or common-law partner, or a child or grandchild who was dependent on the deceased annuitant because of physical or mental infirmity, receives a refund of premiums, an offsetting deduction allows the refund of premiums to be transferred on a tax-deferred (or "rollover") basis to the RRSP of the recipient, or used to purchase an immediate life annuity.
Similar rules also apply in respect of Registered Retirement Income Fund (RRIF) proceeds and certain lump-sum amounts paid from Registered Pension Plans (RPPs). For the purposes of this supplementary information, "RRSP proceeds" also refers to RRIF and lump-sum RPP proceeds and "RRSP annuitant" also refers to a RRIF annuitant and an RPP member.

Registered Disability Savings Plans (RDSPs) were introduced in Budget 2007 to help parents and others save for the long-term financial security of a child with a severe disability. An RDSP is a tax-assisted savings vehicle in which investment income accumulates tax-free. Canada Disability Savings Grants and Canada Disability Savings Bonds may also be paid by the government into the RDSP. Canada Disability Savings Grants, Canada Disability Savings Bonds and investment income are included in the beneficiary's income for tax purposes when paid out of the RDSP.

Budget 2010 proposes to extend the existing RRSP rollover rules to allow a rollover of a deceased individual's RRSP proceeds to the RDSP of a financially dependent infirm child or grandchild.

An individual who qualifies to be an RDSP beneficiary and who meets the age and residency requirements for RDSP contributions will be eligible to roll over RRSP proceeds received as a result of the death of their parent or grandparent to their RDSP if the requirements under the existing RRSP rollover rules are satisfied (that is, if the RDSP beneficiary was financially dependent on the deceased individual by reason of physical or mental infirmity). An infirm child or grandchild is generally considered to be financially dependent if the child's income for the year preceding the year of death did not exceed a specified threshold ($17,621 for 2010). An infirm child with income above this amount may also be considered to be financially dependent, but only if the dependency can be demonstrated based on the particular facts.

The amount of RRSP proceeds rolled over into an RDSP will not be permitted to exceed the beneficiary's available RDSP contribution room. The lifetime contribution limit for RDSPs is $200,000. The rolled-over proceeds will reduce the beneficiary's RDSP contribution room, but will not attract Canada Disability Savings Grants. These proceeds will be considered private contributions for the purpose of determining whether an RDSP is a primarily government-assisted plan (a plan where Canada Disability Savings Grants and Canada Disability Savings Bonds paid to the plan exceed private contributions made to the plan, and which is consequentially subject to a number of additional requirements). Since the amount of RRSP proceeds rolled over to an RDSP will not have been subject to income tax, the amount will form part of the portion of a disability assistance payment that is included in the beneficiary's income when withdrawn from the RDSP.

The RDSP beneficiary or his or her legal representative will be required to make an election in prescribed form to transfer the RRSP proceeds to the RDSP on a rollover basis. The election would be made at the time of the RDSP contribution and filed with both the Canada Revenue Agency and Human Resources and Skills Development Canada by the RDSP issuer.

These measures will be effective for deaths occurring on or after March 4, 2010.

2009 Federal Budget Proposal For RRSP and RRIF Loss Carrybacks

Today's federal budget contains a proposal to allow decreases in the value of Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) after the annuitant's death, but before the funds are distributed to the beneficiaries, to be carried back and deducted against the inclusion of the RRSPs or RRIFs in the deceased annuitant's income in the year of death.

According to the Annex 5, Tax Measures: Supplementary Information and Notices of Ways and Means Motions:

The fair market value of investments held in a Registered Retirement Savings Plan (RRSP) at the time of an RRSP annuitant’s death is generally included in the income of the deceased for the year of death. A subsequent increase in the value of the RRSP investments is generally included in the income of the beneficiaries of the RRSP upon distribution. Similar rules apply in the case of Registered Retirement Income Funds (RRIFs).

There is, however, no existing income tax provision to recognize a decrease in the value of RRSP or RRIF investments that occurs after the annuitant’s death and before they are distributed to beneficiaries.

Budget 2009 proposes to allow, upon the final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of post-death decreases in value of the RRSP or RRIF to be carried back and deducted against the year-of-death RRSP/RRIF income inclusion. The amount that may be carried back will generally be calculated as the difference between the amount in respect of the RRSP or RRIF included in the income of the annuitant as a result of the death of the annuitant and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant.

This measure will apply in respect of deceased annuitants’ RRSPs or RRIFs where the final distribution from the RRSP or RRIF occurs after 2008.

In the last year, I have seen quite a few estates in which the value of RRSPs and RRIFs have declined along with the stock markets. This is a fair proposal, but has not as yet been passed.

British Columbia Exempts RRSPs From Seizure by Creditors

On November 27, 2008, the British Columbia Legislative Assembly passed legislation exempting Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Plans (RRIFs), and Deferred Profit Sharing Plans (DPSPs) from seizure by a planholder's creditors. The legislation has also been given Royal Assent.

Section 13 of Bill 45, the Economic Incentive and Stabilization Statutes Amendment Act, 2008, amends the Court Order Enforcement Act by adding section 71(3), which sets out the new exemptions.

There are some circumstances in which the funds will not be exempt. Specifically, the exemption does not apply to:

(a) to property contributed to a registered plan after or within 12 months before the date on which the debt being enforced came due,
(b) to property that has been or is being paid out of a registered plan,
(c) to an enforcement process that is being effected in support of the enforcement of a maintenance order as defined in the Family Maintenance Enforcement Act, or
(d) to an enforcement process initiated against a registered plan before
November 1, 2008.

But, a transfer of funds by a planholder from one plan to another, or on the death of the planholder to his or her spouse or common law spouse under the terms of the plan, will remain exempt.

British Columbia Government Announces Plan to Exempt RRSPs From Creditors

The Provincial Government announced on Saturday that it plans to exempt funds in Registered Retirement Savings Plans from seizure by creditors. Here is an excerpt from the press release:

The Province will act to protect from creditors RRSP investments that are made with banks, just as they are protected now with insurance companies. The Province will introduce legislation to exempt RRSPs and similar prescribed plans from seizure by creditors. Currently, investments with insurance companies are protected from seizure. This will provide the same protection for RRSPs invested in banks. The current law is unfair, as pension and insurance products that are essentially identical to RRSPs are exempt from seizure. It will also end the inconsistent treatment of RRSPs under provincial law and federal law.

I note that this is an announcement only, and the Province has not brought in legislation or regulation exempting RRSPs as of the date of this post.

Canadian Parliament Exempts RRSPs and RESPs on Bankruptcy

In December, 2007, Parliament passed Bill C-12, amending the Bankruptcy and Insolvency Act. One significant amendment that will affect retirement savings is to exempt funds held in Registered Retirement Savings Funds and Registered Retirement Income Funds from the property available to creditors on bankruptcy.

There is an exception for funds contributed to a plan during the year before the bankruptcy. Property contributed during the year before the bankruptcy will be available to creditors. The reason for the one year exception is to prevent people from transferring funds into a Registered plan on the eve of bankruptcy to avoid paying their creditors.

You can read a legislative summary of Bill C-12 here. Bill C-12 has received Royal Assent, although some portions will come into affect at a later date.

The exemption from seizure in bankruptcy may not protect funds in registered plans from seizure by creditors under British Columbia law if the annuitant does not make a proposal under the Bankruptcy and Insolvency Act. As I have written before, the Canadian Bar Association, British Columbia Branch has been lobbying for provincial legislation in B.C. to protect Registered Retirement Savings Plans and Registered Retirement Income Funds from seizure by creditors.

Can You Use a Power of Attorney to Change a RRSP Beneficiary?

Keith Hawthorne designated his common law spouse, Colleen Desharnais, as the beneficiary of his Registered Retirement Savings Plan at the Toronto Dominion Bank. He also appointed her his attorney under his enduring power of attorney. In fact, he completed two powers of attorney naming her as his attorney each time. But, Keith Hawthorne did not make her beneficiary of his will.

Mr. Hawthorne suffered a brain tumor. He had surgery. Twice. But he lost his competency to make decisions, and he never recovered. Ms. Desharnais was able to assist with his finances, using the power of attorney.

A representative of TD Securities Inc., which is a related company to the Toronto Dominion Bank, suggested to Ms. Desharnais that she could get a better return for Mr. Hawthorne if she transferred the RRSP to TD Securities Inc. She followed the advice, transferring the RRSP to TD Securities Inc.

When she transferred the RRSP, she did not complete the designation of beneficiary form. She assumed the beneficiary would remain the same. TD Securities Inc.’s representative did not advise her about completing the form.

Mr. Hawthorne passed away the following year. TD Securities Inc. paid the RRSP to Mr. Hawthorne’s estate because the designation of beneficiary form was not completed when the RRSP was transferred to TD Securities Inc.

Ms. Desharnais sued both the Toronto Dominion Bank and TD Securities Inc.

In the Supreme Court of British Columbia, Desharnais v. Toronto Dominion Bank, 2001 BCSC 1695, Mr. Justice Clancy held that Ms. Desharnais’ power of attorney did not give her the legal authority to change the designated beneficiary of a RRSP.

Although, the power of attorney gave Ms. Deshaanrais the power to do on behalf of Mr. Hawthorne anything that Mr. Hawthorne could lawfully do by an attorney, this power did not include things that were testamentary (or, as I like to think of it, Will-like) in nature.

Mr. Justice Clancy adopted the following statement from the Legal Education Society of Alberta in its report entitled Enduring Powers of Attorney; Dependent Adults; Living Wills (1991):

It is questionable whether a donor may designate a beneficiary of a pension, insurance policy or Registered Retirement Savings Plan [using a power of attorney]. In the absence of statutory authority to designate a beneficiary, these acts would be testamentary in nature, since they would be "dependant on death for its vigour and effect” (footnote omitted), and accordingly must comply with the Wills Act. It might be possible to designate a beneficiary by an attorney while the donor has capacity but it would be advisable for an attorney to seek the advice and directions of the court if his donor no longer has capacity.

The change in beneficiary—from Ms. Desharnais to no one—was not legal. According to Mr. Justice Clancy,

A valid transfer of the RSP would have required the continuation of the designation of Ms. Desharnais as beneficiary. That action would have been authorized by the power of attorney. It would not have been testamentary in nature.

Mr. Justice Clancy found that TD Securities Inc. and its representative owed Ms. Desharnais a duty to inquire if Mr. Hawthorne had named a beneficiary on the Toronto Dominion Bank RRSP, and advise her to complete the designation to maintain the beneficiary. He held that TD Securities Inc. was liable to pay her the amount of the RRSP she would have received as the beneficiary plus interest on the basis that it was negligent and in breach of its fiduciary duty (or duty of loyalty) to her.

Mr. Justice Clancy also held the Toronto Dominion Bank liable to Ms. Desharnais, on the basis that the Toronto Dominion Bank had a duty to hold the funds instead of permitting an illegal transaction. But, the British Columbia Court of Appeal reversed Mr. Justice Clancy’s holding that the Toronto Dominion Bank was negligent. The Court of Appeal said that Ms. Deshnarnais had not met the onus to establish the scope of the Toronto Dominion Bank’s duty of care to her.

The Court of Appeal did uphold the judgment against TD Securities Inc. You can read the Court of Appeal’s decision here.

It is important that anyone appointed an attorney under a power of attorney, and the financial institutions that deal with the attorney, recognize the limitations on what an attorney may lawfully do under a power of attorney. In this case, the financial institutions involved didn’t until it was too late.

Taxation of Registered Retirement Savings Plans at Death

A registered retirement savings plan (“RRSP”) is a retirement plan that allows taxpayers in Canada to defer tax on savings until retirement. Contributions to RRSPs are tax deductible. Tax on interest, dividends and capital gains on investments in an RRSP is deferred. When the taxpayer takes funds out of the RRSP, he or she then pays taxes on the amount withdrawn each year. You can contribute to your own RRSP or to your spouse’s plan or common law partner’s plan.

What are the tax consequences when the person entitled to an RRSP (the “annuitant”) dies?

The basic rule—to which there are some important exceptions—is that the annuitant is deemed to have received the value of the RRSP at death, and the value is then included in the annuitant’s income in his or her terminal return for the year of death. This can result in very large income taxes in the year of death.

There are some exceptions.

If the annuitant designated a spouse or common law partner (for a definition click here) as the beneficiary of the RRSP, then in the case of a matured RRSP, the spouse or common law partner becomes the successor annuitant and pays the tax as he or she receives payments from the plan. A matured plan is a plan that is paying retirement income. In this case, the estate does not have to pay the tax.

If the plan is unmatured (not yet paying retirement income), and the annuitant designates a spouse or common law partner as the beneficiary, then the spouse or common law partner may elect to transfer the RRSP into his or her own RRSP, Registered Retirement Savings Plan, or qualified annuity, and pay tax when he or she receives payments. Again, the effect is that the estate does not have to pay taxes on the RRSP for the deceased’s year of death.

What if the annuitant designates his or her estate, as the beneficiary of an RRSP, but the annuitant’s spouse or common law partner is a beneficiary of the estate? In that case, the annuitant’s executor or administrator may be able to jointly elect with the spouse or common law partner to have the same rules apply as if the annuitant had named the spouse or common law partner as a beneficiary of the RRSP.

The Income Tax Act, Canada, has similar rules that allow tax to be deferred on an RRSP for beneficiaries who are the annuitant’s financially dependant children or grandchildren. In the case of a child or grandchild who is under 18, an annuity to age 18 may be purchased with the proceeds of the RRSP. Tax is then deferred until the years in which the child receives annuity payments.

In the case of a child or grandchild who is dependant by reason of a physical or mental infirmity (whether over or under 18), the proceeds of an RRSP may be transferred into the child or grandchild’s RRSP, Registered Retirement Income Fund, or annuity.

It is important to keep in mind that if you designate someone other than a spouse, common law partner, or financially dependant child or grandchild as a beneficiary of an RRSP, the tax burden of the RRSP will fall on your estate, rather than on the beneficiary. This may not be important if your RRSP beneficiary is the same person as the beneficiary in your will. But if you are naming others as the beneficiaries in your will, you may be leaving them less than you think, unless you take into account the fact that their share will be reduced to the extent that your estate bears the tax burden in respect of your RRSP.

I have one more exception to point out in this post—which I admit already has too many exceptions. Although the tax burden in respect of an RRSP may fall on the estate, if there are insufficient funds in an estate to pay the taxes, Canada Revenue Agency may collect the tax from the beneficiary of the RRSP.

For more information, see Canada Revenue Agency’s "Death of an RRSP Annuitant" here, and Interpretation Bulletin IT-500R "Registered Retirement Savings Plans -- Death of an Annuitant" here.

The Pitfalls of Haphazard Estate Planning

It appears to become increasingly popular to use joint bank accounts, real estate joint tenancies, life insurance designations, and Registered Retirement Savings Plan (“RRSP”) and Registered Retirement Income Fund (“RRIF”) designations as methods of transferring wealth at death, as Will substitutes. These are all legitimate estate planning tools. Unfortunately, all too often people who are not qualified to give legal advice are suggesting these methods be used to avoid probate fees, and people are taking that advice without consulting with a lawyer. In some cases the results can be disastrous: instead of saving money, in the end the beneficiaries spend tens of thousands of dollars in court.

A case here in the Okanagan decided a couple of years ago illustrates the problem. The case is called Neufeld v. Neufeld, 2004 BCSC 25. Charlotte Neufeld died on July 29, 2003. She appointed her brother Seigfried Neufeld as executor of her Will, and provided in her Will that her estate would be divided equally between her brother Seigfried and her brother Harry Neufeld. Before her death she transferred savings certificates worth a total of $35,000 and a bank account that at her death had about $3000 in it into joint names with Seigfried: She also designated Seigfried as the beneficiary of her RRIF, which was worth about $43,000 when she died.

After Charlotte died, Seigfried took the position that he could keep the savings certificates, the joint bank account and the RRIF for himself. A bank employee testified that she explained to Charlotte that by putting Seigfried’s name on the bank account and the savings certificates, and by designating Seigfried as the beneficiary of the RRIF, Siegfried would receive the proceeds at Charlotte’s death. The bank employee also testified that she felt that Charlotte wanted Siegfried to have the funds.

Harry took the position that Seigfried held the savings certificate, bank account and RRIF for the estate. His evidence was that he, his wife and Charlotte discussed using joint accounts and designating a beneficiary under the RIFF as a means of avoiding probate fees. (See my post on British Columbia Probate Fees here.)

The judge had doubts about the testimony of the witnesses on both sides. He based his decision on a legal presumption that where one person contributes all of the money into a joint account with another, on the death of the contributor, it belongs to the contributor’s estate unless the other joint account holder can show that it is a gift. Lawyers call this presumption a presumption of resulting trust. There are some historical exceptions to this presumption such as transfers from husbands to wives, and from parents to children. In this case, the judge found that Seigfried’s evidence did not overcome the presumption of resulting trust, and he had to share the bank account, savings certificates and the RRIF with Harry.

The court’s decision in this case may surprise some. Although there are many cases where the courts have said that the money contributed by one person into a joint bank account belongs to the contributor’s estate on the contributor’s death, the writer is not aware of any previous case in British Columbia where the court has applied this presumption to a beneficiary designation of a RRIF. (I have written about joint bank accounts here.)

No one will ever no for sure what Charlotte intended. If she intended for Seigfried to keep the joint account, the savings certificates, and the RRIF for himself, she should have asked her lawyer to draw up a clear written memorandum stating her intentions for her to sign.

If Charlotte intended these assets to be shared equally between her brothers, it would have been better if she had kept the bank account and the GIC certificates her sole name, and either designated her estate as the beneficiary of the RRIF, or designated both brothers as beneficiaries.

The potential probate fee savings to Charlotte’s estate were about $1134. The legal costs to the two brothers of the four days trial required to sort out this haphazard estate plan must have been substantially more than that.

Canadian Bar Association Submits Brief on Protecting RRSPs from Creditor Remedies

The Canadian Bar Association British Columbia Branch has submitted a brief to the Minster of Finance advocating legislation exempting Registered Retirement Savings Plans from creditor remedies. The brief has a summary of arguments in favour of exempting Registered Retirement Savings Plans at page 9 as follows:

There are many practical reasons to enact the Registered Plan (Retirement Income) Exemption Act. First, Canadian law encourages retirement savings and the Registered Plan (Retirement Income) Exemption Act promotes and protects this worthy policy goal. Second, the data on retirement savings show that Registered Plans are essential for a healthy and adequate standard of living for British Columbians in retirement. Third, the data show that Registered Plans need to be protected from creditors to maintain this healthy and adequate standard of living. Fourth, the current law inflicts an unfairness on holders of Registered Plans and simple justice requires this unfairness to end now. Fifth, self-employed British Columbians need the protection from enforcement against Registered Plans. Sixth, the Registered Plan (Retirement Income) Exemption Act would yield many benefits, including injecting needed certainty into the law, harmonizing British Columbia law with federal law and encouraging growth in the British Columbia economy. In all, the benefits by enacting the Registered Plan (Retirement Income) Exemption Act would make British Columbia a leader across Canada.

Currently, British Columbia law affords creditor protection for Registered Pension Plans, and some life insurance products, while other Registered Plans are not afforded similar protection during the lifetime of the owner.

The brief is available here.