IS A TAX-DEFERRED ROLLOVER STILL AVAILABLE IF SOMEONE RECEIVES RRSP PROCEEDS THROUGH THE DECEASED’S WILL?
Section 146(8.1) of the ITA allows for a refund of premiums when RRSP proceeds are received by a beneficiary through a gift by will, provided the beneficiary is qualified and the deceased’s executor jointly elects with the beneficiary to treat the proceeds as a refund of premiums.
The executor and beneficiary must complete and sign CRA form T2019. The form should be included in the tax returns for both the deceased and beneficiary for the year payment is made to the deceased’s estate.
When this occurs, the date-of-death income inclusion is normally transferred from the deceased to the beneficiary – part 1 of the rollover process. Thereafter, if an RRSP contribution is made to the beneficiary’s RRSP or RRIF before the end of 60 days after the year the RRSP assets are paid to the deceased’s estate, the beneficiary can claim a 60(l) tax deduction, offsetting the income inclusion – part 2 of the rollover process.
Trevor recently died. On Trevor’s RRSP application, his estate was named beneficiary, but his wife, Nicky, is beneficiary of his estate. In an attempt to minimize tax payable for the year of death, Nicky and Trevor’s executor, his adult son, Phil, jointly elect to treat the RRSP payment to Trevor’s estate as a refund of premiums taxable to Nicky. CRA form T2019 is completed and included in the tax returns for both Trevor and Nicky for the year of payment to Trevor’s estate to indicate the details of the transaction. The RRSP proceeds are then paid to Nicky via Trevor’s estate, and a contribution to Nicky’s RRSP is subsequently made (before the end of 60 days following the year of payment to the estate). The end result is a tax-deferred rollover – a date-of-death income inclusion to Nicky, offset by an RRSP tax deduction.
This provision has brought much relief to executors and beneficiaries who realize after the death of an RRSP annuitant that he failed to designate a qualified beneficiary on his RRSP application. Sometimes the omission is intentional (e.g., to allow for greater control over the distribution of the asset); sometimes it is not. In Quebec, with the exception of insurance contracts, RRSP beneficiary designations cannot be made on or pursuant to plan contracts, meaning such designations are usually made by way of will.
The 146(8.1) election provides flexibility in tax planning in that partial rollovers are allowable (which can allow for use of a deceased annuitant’s lower tax brackets or unused tax credits to minimize RRSP tax payable). A similar provision is available on death of a RRIF annuitant (CRA form T1090 is used for this purpose). But, annuitants and advisors should keep in mind that RRSPs and RRIFs paid to an estate are normally subject to probate tax, estate creditors and complex estate settlements where applicable.
Wilmot George, CFP, TEP, CLU, CHS, is director of tax and estate planning at Mackenzie Investments. Wilmot can be contacted at [email protected]