A recent decision of the Ontario Superior Court of Justice revisits the issue of whether a presumption of resulting trust should be imposed in the case of a beneficiary designation.
As our readers will know, the leading case on presumptions of resulting trust remains Pecore v Pecore, 2007 SCC 17, in which the Supreme Court summarized the state of the law relating to property that had been gratuitously transferred into joint tenancy with a non-dependent adult child: the asset becomes subject to a presumption that it is impressed with a resulting trust in favour of the parent’s estate. The presumption may be rebutted by evidence that it was, in fact, the parent’s intention to gift the jointly-held property to the adult child by right of survivorship.
Last year, we saw a couple of decisions apply the principles of Pecore to novel situations, potentially expanding the applicability of presumptions of resulting trust. For example, in Calmusky v Calmusky, 2020 ONSC 1506, the doctrine of resulting trust was applied to a RIF for which an adult child had been designated as beneficiary.
In Mak Estate v Mak, 2021 ONSC 4415, Justice McKelvey reviewed the issue of whether an asset for which a beneficiary designation was in place should be subject to the presumption of resulting trust. The plaintiff residuary beneficiaries of their mother’s estate sought an order setting aside the 2007 beneficiary designation for the mother’s RRIF, under which the defendant, their brother and another residuary beneficiary of the estate, was named. The evidence suggested that the deceased had relied upon the defendant, who lived with her and drove her to appointments after the death of the parties’ father in 2002.
After addressing the issue of whether a presumption of undue influence applied to the RRIF beneficiary designation (and finding that it did not because a beneficiary designation is not an inter vivos gift), Justice McKelvey turned to the issue of the principle of resulting trust, writing (at paras 44, 46):
In my view…there is good reason to doubt the conclusion that the doctrine of resulting trust applies to a beneficiary designation. First, the presumption in Pecore applies to inter vivos gifts. This was a significant factor for the Court of Appeal in Seguin, and similarly is a significant difference in the context of a resulting trust. Further, the decision of this Court in Calmusky has been the subject of some critical comment. As noted by Demetre Vasilounis in an article entitled ‘A Presumptive Peril: The Law of Beneficiary Designations is Now in Flux’, the decision in Calmusky is, ‘ruffling some features among banks, financial advisors and estate planning lawyers in Ontario’. In his article, the author comments that there is usually no need to determine ‘intent’ behind this designation, as this kind of beneficiary designation is supported by legislation including in Part III of the Succession Law Reform Act (the “SLRA”). Subsection 51(1) of the SLRA states that an individual may designate a beneficiary of a ‘plan’ (including a RIF, pursuant to subsection 54.1(1) of the SLRA.)
It is also important that the presumption of resulting trust with respect to adult children evolved from the formerly recognized presumption of advancement, a sometimes erroneous assumption for a parent that arranges for joint ownership of an asset with their child is merely ‘advancing’ the asset to such adult child as such adult child will eventually be entitled to such asset upon such parent’s death. The whole point of a beneficiary designation, however, is to specifically state what is to happen to an asset upon death.
As a result, the defendant was entitled to retain the proceeds of his mother’s RRIF, as the plaintiffs unable to establish any intention of their mother to benefit her estate with the asset without the benefit of a presumption of resulting trust.
In light of the conflicting applications of Pecore under the Calmusky and Mak Estate decisions, it will be interesting to see how this issue may be further developed in the case law. For the time being, however, it may be prudent to take care in documenting a client’s wishes to benefit an adult child by way of beneficiary designation in the same manner as we typically would in situations of jointly-held property.
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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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In today’s podcast, Noah Weisberg and Sayuri Kagami discuss the Alberta decision of Re Morrison Estate, 2015 ABQB 769, and the issue of who is responsible for the often hefty taxes payable on registered accounts of a deceased person: the beneficiary of the account or the deceased’s Estate.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
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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In Kuchta v The Queen, 2015 TCC 289, the Tax Court of Canada had occasion to consider some interesting issues with respect to the meaning of “spouse” in the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “ITA”) and a spouse’s joint and several liability for a deceased spouse’s tax liabilities on death.
Ms. Kuchta was married to Mr. Juba (the “Deceased”) at the time of his death in 2007. Ms. Kuchta was the designated beneficiary of two of the Deceased’s RRSPs, and she accordingly received $305,657.00 upon the Deceased’s death. The Deceased was assessed by the Minister of National Revenue (the “Minister”) and found to owe $55,592.00 in respect of his 2006 taxation year. After the Deceased’s Estate failed to pay that amount, the Minister assessed Ms. Kuchta for the amount owing, pursuant to s. 160(1) of the ITA. This section provides that where a person has transferred property to their spouse, the transferee and transferor are jointly and severally liable to pay the transferor’s tax.
Ms. Kuchta’s position was that, three of the four requirements of s. 160(1) were met, but that the last requirement had not been met. Ms. Kuchta stated that she was not the Deceased’s spouse at the time of transfer of the RRSPs, as it occurred immediately after the Deceased’s death, at which point their marriage had ended. The Court, therefore, had to consider (a) when should the relationship between Ms. Kuchta and the Deceased be determined; and (b) does the word ‘spouse’ in s. 160(1) include a person who was, immediately before a tax debtor’s death, his or her spouse?
With respect to issue (a), if the relationship is determined at the time that Ms. Kuchta was designated as beneficiary of the RRSP, they would have been married, whereas if the relationship were determined at the time of transfer, they would not have been married. The Court easily concluded that the relationship should be determined at the time of transfer. It then had to determine whether the word “spouse” in s. 160(1) is sufficiently broad to include Ms. Kuchta at the time of transfer. That is, whether it included widows and widowers.
The Court undertook a “textual, contextual and purposive analysis of the word ‘spouse’ in subsection 160(1).” After a lengthy and thorough analysis, the Court concluded that the word ‘spouse’ must have been intended to include widows and widowers. It found that Parliament used both the legal and colloquial meanings of the term in the ITA, which differ from each other, thus presenting conflicting interpretations and ambiguity. However, the purposive analysis was found to point to an interpretation that includes widows and widowers.
Ultimately, therefore, Ms. Kuchta was found jointly and severally liable for the Deceased’s unpaid taxes, as a result of the beneficiary designation of the Deceased’s RRSPs. It will be interesting to see how this case applies going forward, and we should keep in mind that the Minister may be able to collect on unpaid taxes from the beneficiary of a Deceased’s RRSP.
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In Kiperchuk v. The Queen, 2013 TCC 60 (CanLII), the Tax Court of Canada held that a spouse who received RRSP benefits upon her spouse’s death was not liable to pay the deceased’s unpaid tax debt arising prior to his death.
There, deceased designated his wife as the beneficiary of his RRSP. The couple subsequently separated, and divorce proceedings were commenced. However, the designation remained in place. Prior to his death, the deceased incurred significant tax debts, which were unpaid as at the time of his death. His estate was insufficient to pay the tax debts. CRA sought to find the wife liable for the unpaid taxes. It relied on s. 160 of the Income Tax Act which, in effect, imposes joint liability for unpaid taxes (to a certain extent) where a tax payer transfers property to a spouse, child or “person with whom the person was not dealing at arm’s length” for less than fair market value.
The Court refused to find the wife liable. Although it had no difficulty in finding that there was, in fact, a transfer, the transfer took place at the time of death. As of that date, the status of marriage ended due to death, and the wife was, therefore, no longer a spouse, and further, “nor was she a person with whom the transferor was not dealing at arm’s length at the time of the transfer”.
The Court may have been splitting hairs here. The transfer took effect on the moment of death, and as of that moment, according to the reasoning, the parties were no longer spouses: the husband “was not related to the appellant by marriage at the time she became entitled to the RRSP”. “The status of marriage is ended by death… .”
Further, the Court does not give much explanation as to why it considered the transfer to be at arm’s length.
Finally, the limited application of the case should be noted. The case dealt only with tax liability arising before death: a beneficiary of an RRSP is liable for unpaid income tax on the RRSP proceeds where the estate is unable to pay: s. 160.2(1) of the Income Tax Act.
Thank you for reading.
Listen to Pre-probate Checklist
They then wrap up their ongoing discussion about some useful steps to remember when administering an estate.
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
Last week, the Globe and Mail published an article on RRSP Myths, which is a timely subject with the deadline for contributions fast approaching. It dealt briefly with the taxation of an RRSP on the death of its holder.
The general rule is that, upon death, the holder is deemed to have withdrawn all the funds in the RRSP as at the date of death and will be taxed on the entire amount. This means that, generally speaking, the estate of the holder will pay the taxes, not the beneficiary of the RRSP.
The value of the RRSP is required to be reported on the deceased’s terminal tax return as part of his or her income in the year preceding death. Depending on the RRSP’s value and the total income of the deceased in that year, the proceeds of the RRSP might end up being taxed at the highest marginal value.
There are some circumstances where the estate will not be required to pay taxes on the RRSP:
- If the beneficiary of the RRSP is the spouse or common law partner of the deceased, then the RRSP funds can be transferred to his or her RRSP or RRIF, or they can be used to purchase an annuity.
- If the beneficiary of the RRSP is a financially dependant child or grandchild under the age of eighteen, the funds can be transferred to him or her to purchase an annuity. If the beneficiary is a financially dependant, mentally or physically infirm, child or grandchild of any age then the funds can be used to purchase an annuity or transferred to his or her RRSP or RRIF.
Another option is to designate a charity as the beneficiary. While the estate will still be liable to pay taxes on the value of the RRSP, it will be eligible for a tax credit, the effect of which is normally to offset the tax on the distribution.
For more information on these issues, check out the CRA Information sheet on the Death of an RRSP Annuitant.
Have a great day!