Live, die and leave no taxes behind

National Post

2008-02-23


Advisors often recommend naming a beneficiary on your RRSP or RRIF so that upon your death the full value can be immediately transferred to your heir, free of such burdens as probate taxes.

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.

In cases where no rollover is available, perhaps due to the death of a spouse or partner, the tax issues become more complex. Since the beneficiary of the RRSP or RRIF gets the fair market value of the plan, the tax burden associated with that generally falls to the estate.

The key word here is "generally." As a decision in a recent tax case demonstrates, the estate doesn't always inherit the tax burden.

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 a 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 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 a RRIF jointly and severally liable for such taxes, the CRA could properly go after Ms. Belanger for the taxes owing.

How could this have been avoided? It may be worthwhile to name the estate as the beneficiary of an RRSP or RRIF and then name the ultimate beneficiary of the RRSP or RRIF proceeds in the will, especially when no qualifying rollover is available. While it may cost you some probate tax, it will at least ensure that the income tax liability follows the money.