Does an attorney, or guardian, have the power to change a grantor’s estate plan?
According to section 31(1) of the Substitute Decisions Act, a guardian of property (or attorney for property) has the power to do on the incapable person’s behalf anything in respect of property that the person could do if capable, except make a will.
The statute, however, is deceptively simple. Can a guardian transfer property into joint tenancy? Can a guardian sever a joint tenancy? Can a guardian change a beneficiary designation on a RRSP, RRIF or insurance policy? Can an inter vivos trust be established or an estate freeze undertaken to save taxes? There are numerous cases which have tested these issues.
For instance, in Banton v Banton, Justice Cullity found that although the grantor’s attorneys had the authority to create an irrevocable inter vivos trust, they nonetheless breached their fiduciary obligations owing to the grantor, in creating the trust.
The irrevocable trust provided for income and capital at the trustee’s discretion for the grantor’s benefit during his lifetime and a gift over of capital to the grantor’s children, who were also the attorneys. The scheme of distribution of the irrevocable trust was the same as provided for in the grantor’s will. However, the court found that the fact that the remainder interest passed automatically to the grantor’s issue defeated the grantor’s power to revoke his will by marriage and would deprive his common law spouse of potential rights under Parts II and V of the Succession Law Reform Act and Part I of the Family Law Act. The court found that the gift of the remainder of the interest went beyond what was required to protect the grantor’s assets.
Justice Cullity stated:
“I do not share the view that there is an inviolable rule that it is improper for attorneys under a continuing power of attorney to take title to the donor‘s assets either by themselves or jointly with the donor . This must depend upon whether it is reasonable in the circumstances to do so to protect or advance the interest, or otherwise benefit, the donor.”
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If a Registered Retirement Savings Plan passes outside of an Estate, for example to a spouse or child, who pays the tax – the recipient beneficiary or the Estate?
In order to answer this question, first consider the terms of the Will.
If the Will does not clearly set out who is responsible, attention must be turned to the statute and common law.
According to section 160.2(1) of the Income Tax Act, the deceased testator and the recipient of the RRSP are jointly and severally liable for the payment of the tax. The section specifically states that “…the taxpayer and the last annuitant under the plan are jointly and severally, or solidarily, liable to pay a part of the annuitant’s tax…”.
Ontario common law has, however, held that the payment of any tax liability with respect to an RRSP remains the primary obligation of the estate. Payment should be sought from the RRSP recipient, only if there are insufficient assets in the estate to satisfy the tax obligation.
In Banting v Saunders, Justice J. Lofchik held that:
“…the estate, rather than the designated beneficiaries, is liable for the income tax liability arising from the deemed realization of the R.R.S.P.’s and R.R.I.F.’s so long as there are sufficient assets in the estate including the bequest to Banting, to cover the debts of the estate and it is only in the event that there are not sufficient assets in the estate to cover all liabilities that the beneficiaries of the R.R.S.P.’s and the R.R.I.F.’s may be called upon.”
Nonetheless, as set out in O’Callaghan v. The Queen, the CRA may first seek payment directly from the RRSP recipient, instead of the estate, especially if there is a possiblity that there are insufficient assets in the estate to satisfy the tax.
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Yesterday I blogged about an Alberta case where, although it was found that a RRIF belonged to a designated beneficiary and was not subject to application of the resulting trust principle established in Pecore, the beneficiary was required to personally bear the RRIF tax obligation on various grounds, including that (i) it was “manifestly unfair” that the Estate pay the tax as such result would preclude certain gifts in the Will from being made, (ii) the designated beneficiary would otherwise be unjustly enriched and (iii) the Court inferred that the testator was under the mistaken impression that the tax obligation would be paid out of his estate assets.
Given the provisions of our governing statutes and their interpretation by the Courts, in Ontario we would not likely see this type of outcome. The applicable legislation is:
- Subsection 2(1) of the Estates Administration Act (“EAA”)– it provides that the designation of a beneficiary of a fund is a testamentary disposition, such that the fund devolves to the estate and is subject to the claims of creditors.
- Section 53 of the Succession Law Reform Act (“SLRA”) – it provides that if a person is designated as the beneficiary of a plan, the person administrating the plan can pay the full proceeds to the named beneficiary. The administrator is discharged from any further obligation with respect to payment, and the named beneficiary may enforce payment of the benefit.
Section 53 has been interpreted by the Ontario Court of Appeal as an exception for RRSPs (and other such funds) from s. 2(1) of the EAA such that these types of assets do not form part of an estate but instead devolve directly to the designated beneficiary: see Amherst Crane Rentals v Perring, 2004 CanLII 18104 (ON CA).
In Amherst, the appellant was a creditor of the deceased. The respondent was the deceased’s widow and designated beneficiary of RRSP funds. The estate was insolvent, and the creditor sought to obtain payment of the debt owed from the proceeds of the RRSPs. The application Judge held that the RRSPs devolve directly to the designated beneficiary – the creditor had no right to seek repayment of the debt from the proceeds of the RRSPs, even though the estate was unable to pay its debts. The decision was appealed, and upheld by the Court of Appeal for Ontario.
So in Ontario it would appear the only way to get assets such as RRSPs and RRIFs clawed back into an estate is through the provisions of section 72 of the SLRA.
Thanks for reading and have a great weekend,
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.
Thanks for reading,
It’s tax season. That wonderful time of year for number crunching, hunting for receipts and depending on your situation, hair pulling.
If you are an executor of the estate of a deceased person, you also have the responsibility of filing the deceased’s "final return." To borrow from a popular expression, the two certainties, death and taxes, follow each other. Final tax returns for those who die during the period from January 1 to October 31 are due April 30 of the following year.*
While there are no inheritance taxes in Canada there are a number of taxes that arise as a result of your death and must be included in the final return. Some of those taxes include the following:
Capital Gains Tax. For the purpose of calculating tax, the CRA deems a deceased to have disposed of all her capital property immediately before her death. This is referred to as a “deemed disposition.“ Depending on the deemed proceeds of disposition, there may be a capital gain or loss. Certain types of capital property are exempt from this rule and an expert should be consulted for specific advice.
RRSPs and RRIFs. These tax sheltered investment vehicles lose their status as such at death. When you die, the tax holiday ends and your RRSPs and RRIFs are collapsed. There is a deemed sale of any securities held in the RRSP or RRIF and any income made in the year preceding your death must be included in the final return. There are a few notable exceptions to this rule, such as a spousal rollover and transfers of your plan to minor and/or mentally infirm children.
There are many creative ways of reducing the taxes that surface after your death. The benefits of doing so may be substantial and result in considerable savings for your estate. When you consider the fact that you spend a lifetime building your assets, speaking to a profession about your estate is advisable. Your beneficiaries will thank you.
*For more information on how to file a final return, visit the Canada Revenue Agency’s website