Recently, the Canada Revenue Agency (“CRA”) was asked to comment on a scenario involving the transfer of a RRSP and a capital asset between ex-spouses, and one the spouses dies before the rollover can be effected: Do the tax free rollover provisions found in the Income Tax Act (“ITA”) still apply?
In the scenario presented to the CRA, Mr and Mrs. Z are ex-spouses. They have a written separation agreement in which Mr. Z owes $500,000 to Mrs. Z. Mr. Z has committed to transferring a capital asset of $ 300,000 and an amount of $ 200,000 from his RRSP in settlement.
Mr. Z. passes away before the transfers can be completed.
With regard to the RRSP, the CRA was of the view that the relevant sections of the ITA only apply between former spouses who are living at the time of transfer. At the time of death, Mrs. Z. is no longer considered the spouse or common-law partner of Mr. Z. Therefore, the definition of premium refund in the relevant section of the ITA does not apply in a transfer to Mrs. Z because she is not considered to be an ex-spouse even if this transfer is in settlement of the rights arising from their union. The CRA concluded, therefore, that the tax-free rollover is no longer possible and that Mr. Z’s estate will have to pay taxes on the transferred property.
With regard to the capital asset, the CRA pointed out that normally the transfer of an asset under the ITA allows for the deferral of taxation at the time of transfer of the capital property if the requirements of the ITA are respected, including the transfer having been made by an individual (and not a trust). An estate is considered a trust pursuant to the definition of a trust under the ITA. Since Mr. Z passed away before completing the transfer of the asset, the transfer would have be made by his estate which is a trust and would not be, in the CRA’s opinion, in compliance with the requirements of the ITA for the deferral of taxation.
The unfortunate events outlined in this scenario led regrettably to more misfortune, but as an estate administrator or trustee, perhaps having some awareness of these rules might save you some grief in the long run.