Does the resulting trust principle apply to RRIFs?
In Morrison Estate (Re), 2015 ABQB 769 (CanLII), a decision of the Court of Queen’s Bench of Alberta, one of the beneficiaries of the Estate of John Robert Morrison brought an application for directions, including seeking a direction that a certain Registered Income Fund (“RRIF”) is an asset of the Estate and not the property of the designated beneficiary.
The key facts include the following:
- The testator died in 2011. He was survived by his four children, Robert, Douglas, Cameron and Heather.
- Under the testator’s Will everything was to be divided equally among his children with the exception of $11,000, which was to be deducted from Robert’s share and divided equally among the surviving grandchildren.
- The designation with respect to the RRIF was made shortly after the Will. Douglas was designated as the sole beneficiary. The RRIF was worth approximately $72,000.
- The Estate was worth approximately $77,000.
- Because of the income tax treatment of RRIF, its proceeds went to Douglas, while the tax burden fell to the Estate, the result being insufficient money in the Estate to pay the bequests to the grandchildren.
Cameron asserted that there was no consideration for Douglas to have been designated as a beneficiary, and that Douglas failed to prove that his father intended to gift him the RRIF.
The application Judge, The Honourable Robert A. Graesser, noted that since the decision in Pecore, there is the potential that any non-spousal designated beneficiary (whether under an RRSP, RRIF or life insurance policy) will be deemed to hold proceeds in trust for the donor’s estate unless he or she can prove that a gift was intended. However, Graesser J. refused to apply Pecore, as that would “create untold uncertainties in what are likely hundreds of thousands if not millions of beneficiary designations in Canada”.
His Honour held that Douglas was entitled to the RRIF, finding that he had established on a balance of probabilities that his father intended to give him the RRIF. The designation being made shortly following the execution of the Will was one of the key factors that lead to this outcome.
However, the twist lay in the tax issue. Douglas was required to pay the RRIF tax to the Estate, a conclusion reached by His Honour using the following rationale and principles:
- It was “manifestly unfair” that the Estate pay the tax owing on the RRIF, particularly since Douglas bearing the tax burden would leave just enough funds in his estate (after payment of debts and expenses) to effect the $11,000 gifts to the grandchildren.
- An inference was drawn that (1) Mr. Morrison must have been under the impression that Douglas would bear any tax liability on the RRIF, and (2) if Mr. Morrison had been aware that the RRIF would be taxable in his estate’s hands, he would have changed his will or changed the designation accordingly.
- s. 8 of the Judicature Act, RSA 2000 c J-2 was applied, which grants the Court discretion to grant remedies that seem just to the Court.
- Similarly, equitable principles and remedies of unjust enrichment and mistake were used to conclude that Douglas holds proceeds of the RRIF under a constructive trust for the Estate as to the amount of tax paid by the Estate on the RRIF .
The decision was concluded with a tip, being to amend the beneficiary designation forms by having an express statement as to the designator’s intentions.
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