Can RRIF proceeds paid after death to a testamentary trust, and used to purchase an annuity for the deceased’s grandson, qualify for a tax deferred rollover?
The Canada Revenue Agency (“CRA”) was recently asked to rule on the following set of circumstances and facts.
The grandson’s parents were incapable of caring for him and he was placed in the annuitant’s custody. He lived with the annuitant and she provided financially for all his needs. The annuitant was appointed as the grandson’s guardian by Court Order. The Court Order stated that all powers, responsibilities, entitlements of guardianship and decision-making regarding the grandson would be the sole responsibility of the annuitant. The grandson never had any income for income tax purposes. The annuitant remained as a guardian right up to the time of her death.
In the Will, the grandson’s share of the estate of the annuitant (the “Estate”) was to be held by the Personal Representative in a separate trust (the “Trust”) for the exclusive benefit of the grandson until he attains a specified number of years of age, subject to the Personal Representative’s discretion to encroach for the grandson’s maintenance, education, benefit and advancement in life. To the best of the Personal Representative’s knowledge, information and belief, the grandson was solely financially dependent on the annuitant for all his material needs.
The Will provided the Personal Representative with discretionary power to allocate assets in kind for payment of any share of a beneficiary and to make decisions regarding matters under the Income Tax Act (“the Act”).
Included in the assets of the Estate were two registered retirement income funds (RRIFs). These amounts were included in the annuitant’s income in the year of death pursuant to the provisions of the Act. The RRIFs were wound-up at which time the proceeds of both RRIFs were received by the Personal Representative. No other payments were made from the RRIFs after the death of the annuitant.
The Personal Representative proposed to allocate the grandson’s entire bequest out of the proceeds of the RRIFs. The Personal Representative and the grandson would jointly designate all or part of the amounts received by the Personal Representative from the RRIFs in 2016 to be a designated benefit of the grandson for tax purposes.
The Personal Representative, as trustee of the grandson’s share of the Estate, would then purchase an annuity from a licensed annuities provider that meets the conditions of the Act, with the Trust as the annuitant under the Annuity and the grandson the sole beneficiary of the Annuity; the Annuity would be for a term not exceeding 18 years minus the grandson’s age in whole years at the time it is acquired; and in the event of the grandson’s death, any amounts that would otherwise be payable after his death will be commuted to a single payment. The grandson would then elect in his 2016 income tax return to have the rollover provisions contained in the Act apply to the amount paid to acquire the Annuity.
The purpose of the transactions is to reduce the taxes resulting from the annuitant’s death to the minimum allowable by the law by shifting the tax burden to the grandson and spreading the realization of the tax burden over a number of years during which the grandson will be able to shelter much of the income with his personal deduction, while at the same time maintaining control of the capital and income of the Estate so it can be administered in accordance with the annuitant’s wishes.
The CRA ruled that the transactions satisfied the conditions for the rollover, notably the grandson was financially dependent on the deceased RRIF annuitant at time of death and the trust provides that the grandson is the sole person beneficially interested in the annuity:
1. The amount jointly designated for each RRIF would be a designated benefit of the grandson. Accordingly the amount included in the grandson’s income may be deducted, from the amount deemed to have been received by the annuitant from the RRIFs.
2. The Personal Representative will be entitled to request a reassessment of the deceased annuitant’s income tax return to reflect this deduction.
3. The grandson wouldl be entitled to deduct from his income for the 2016 taxation year the amount paid by the Personal Representative to acquire the Annuity to the extent permitted under the Act.
Provided the grandson is alive at the time of payment, the amount of each payment out of or under the Annuity will be included in the grandson’s income for the taxation year in which the payment was made, and not included in the Trust’s income, pursuant to the Act.