Wanted: Dead or Alive. Your Taxes

It is important to note that RRSP’s have been set up to ensure that the Canada Revenue Agency (CRA) benefits from the removal of funds, whether you are dead or alive.

It has been a regular practice of advisors to suggest that there needs to be an assigned beneficiary to your RRSP or RIFF.

CRA has recently won a tax case that sets the precedent that we can no longer expect to be able to bypass probate fees by having an RRSP beneficiary.

If you designate your spouse or partner as the beneficiary, the RRSP or RRIF will qualify for a tax-deferred “rollover” to the surviving partner’s RRSP or RRIF. This is fine with CRA as they will get their loot later.

In cases where no rollover is available due to the death of a spouse or partner, the tax issues change. The tax burden associated with that generally falls to the estate.

Gail L. Belanger was reassessed by the Canada Revenue Agency for more than $6,200 in taxes resulting from her liability on approximately $15,600 she received in 1998 from her late mother’s RRIF.

Ms. Belanger testified that when her mother named her children as direct beneficiaries of her RRIF, it was her intention that the proceeds of the RRIF were to be received by her children “directly and not through her estate” and that the estate be responsible for paying the taxes on the RRIF.

The CRA attempted to collect the estate taxes owing on the RRIF over several years, but without success. It finally turned to the joint and several liability rule under the Income Tax Act, which says that upon the death of the annuitant of an RRIF, the annuitant (or the annuitant’s estate) and any recipient of RRIF proceeds are “jointly and severally liable to pay a part of the annuitant’s tax” on the RRIF for the year of the annuitant’s death.

Ms. Belanger argued that the CRA’s failure to collect the tax owing from the estate and its subsequent attempt to collect it from the beneficiaries was “not fair.” She maintained that the Tax Court should hold the executor of the estate of her late mother accountable for any liability of the estate.

The judge found that since the fair market value of the RRIF was indeed taxable in Ms. Belanger’s late mother’s return and since no rollover was available, the estate was appropriately liable for the taxes owing on the RRIF.

And, since the Act also makes a taxpayer who received monies from an RRIF jointly and severally liable for such taxes, the CRA could properly go after Ms. Belanger for the taxes owing.

The bottom line here is: don’t think that your government wants you to retire better off and be sure that they do want your money, regardless whether you are dead or alive. The answer is clear: use your RRSP wisely and at the age of 69 make sure there is no money there for when you die or retire.

In the mean time you need a strategy to transfer the money from within your RRSP to outside your RRSP and plan to do it without paying taxes on the money.