Tax Relief Proposed for Deceased Annuitants
Fair market value loss could be recouped
by Jamie Golombek
When the annuitant of a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) dies, he or she is considered to have received a taxable benefit equal to the fair market value (FMV) of his or her RRSP or RRIF immediately before death.
RRSP/RRIF decline in value
An age-old problem exists when the fair market value of an RRSP or RRIF declines in value below the FMV amount that was included on the deceased annuitant's terminal tax return.
The effect of this is that the deemed taxable benefit is reported to the deceased annuitant on a T4RSP or a T4RIF and is therefore included in his or her terminal tax return. Taxes approaching 50 per cent can be levied on the fair market value of this RRSP or RRIF. If the property has declined in value, the estate ends up having to pay tax on an amount that is actually greater than the amount that is received on the ultimate windup of the RRSP or RRIF.
Assume that Mrs. Jones held ABC Inc. shares in her RRSP that were worth $200,000 when she died. By the time her RRSP was finally paid out (perhaps after seeking letters probate because there was no named beneficiary), 18 months elapsed, the market crashed and the FMV of the ABC shares had fallen to $120,000.
Currently under the Income Tax Act, there is no mechanism to be able to claim the $80,000 loss. In other words, Mrs. Jones' estate would receive a T4RSP slip reporting the fair market value of the RRSP at the date of death (i.e., $200,000) to be reported on Mrs. Jones' final tax return, notwithstanding the fact that the estate only received $120,000 of proceeds after ultimately selling the shares.
CRA and Finance acknowledge the problem
This issue was initially brought to the attention of the Department of Finance by the Canada Revenue Agency (CRA) over 10 years ago. At that time, the Department confirmed that unintended tax consequences may result in certain situations. Finance officials also said that because a change to the legislation may further complicate the law (which is already complicated enough), they wanted actual cases to study before they made a recommendation.
Several cases were referred to the CRA for consideration and in early 2000, the CRA submitted to the Department of Finance a proposed administrative solution to the problem, which was accepted in principle.
The 2001 Consultation session
In October 2001, at the CRA's Annual Industry Consultation session put on by the Registered Plans Division, this issue was discussed again. Apparently, various RRSP and RRIF issuers and carriers had been filing negative amounts on the T4RSP and the T4RIF slips in respect of this decrease in value after death.
At that session, the CRA clearly stated that this was inappropriate and that they do not accept negative amounts on a T4RSP or a T4RIF as a way to report a decrease in value after an annuitant's death. They went on to confirm that any losses incurred by the RRSP cannot be transferred to the deceased, their estate or their beneficiaries.
The 2002 Consultation session
At the 2002 RRSP Consultation session, the CRA announced that they were willing to provide administrative relief only in situations where all the funds paid out of or under a deceased annuitant's unmatured RRSP or RRIF continue to be sheltered through a qualifying rollover. This would occur on the qualifying transfer to a spouse or common-law partner or a financially dependent child or grandchild of the annuitant, under the normal rules for such transfers.
The CRA said that it would accept administrative relief requests from a deceased annuitant's legal representative as well as from RRSP issuers and RRIF carriers if authorized. Such requests should provide the name and social insurance number of both the deceased annuitant and the qualified beneficiary, the details of the qualifying transfer (i.e., the amount and location of the transferred funds) as well as the amount of the decrease in value for which administrative relief is being sought.
The CRA also stated at the time that for all situations in which no qualifying tax-deferred transfer was available, no tax relief would be granted for a decrease in value.
The Joint Committee's recommendation
On July 29, 2005, the Joint Committee on Taxation of The Canadian Bar Association and The Canadian Institute of Chartered Accountants published a technical submission it wrote to the Department of Finance requesting various technical amendments to the Income Tax Act. Among the committee's amendments was a specific request to correct the above problem.
The committee recommended that new legislation should be implemented to deal with a decline in the value of plan assets held at death, similar to the rules in the Act that currently tax the appreciation of RRSP/RRIF assets after death.
Currently, the Act taxes an appreciation of RRSP assets after death as income and also provides a means to prorate that income inclusion when only a portion of the RRSP is rolled over to a plan for a spouse, common-law partner or qualified child. The committee recommended that similar rules should apply when a decline in value has occurred.
Finally, the committee also recommended, for the sake of consistency with other rules for losses after death, that the loss should be treated as an income loss, which would therefore be eligible for carryback to the terminal return to partially offset the FMV income inclusion on death.