In Will drafting, it is common to include beneficiary designations for life insurance, TFSAs and RRSPS/RRIFs, but sometimes pension plans are overlooked. If the client has a spouse (married or common law), the spouse will automatically receive the client’s pension survivor benefits pursuant to Ontario law. However, members of a plan generally have the ability to designate a non-spouse beneficiary to receive benefits in the event that they die with no spouse surviving. In Ontario, the ability to designate a beneficiary by Will to receive benefits from a pension plan on a member’s death is found in sections 50 and 51 of the Succession Law Reform Act.
As with any asset, when making a pension plan beneficiary designation it is important to ask: who pays the tax? Failure to consider this question can result in an asset distribution that is not in line with the client’s intention (e.g. when the residuary beneficiaries of an estate bear the tax burden of a RRSP that goes to a different beneficiary, as in the recent case of Morrison v. Morrison.
In a recently released severed letter, the CRA was asked whether a payment from a pension plan as a result of the death of the member is taxable and, if so, whether the payment qualifies for the $10,000 “death benefit” exemption. Under the proposed hypothetical scenario, a distribution was made to the taxpayer as the designated beneficiary of a deceased pension plan member. The CRA confirmed that the amount received by the taxpayer would be considered a “superannuation or pension benefit” and not a “death benefit”. It would therefore be included in the taxpayer’s income for tax purposes pursuant to subparagraph 56(1)(a)(i) and would not qualify for the $10,000 “death benefit” exclusion.