2016-0627341R3 Rollover of RRIF proceeds after death

Principal Issues: Whether RRIF proceeds paid after the death of the annuitant to a testamentary trust and used to purchase an eligible annuity for the benefit of the deceased’s grandson qualify for a tax deferred rollover.

Position: Yes

Reasons: The transactions satisfy the conditions for the rollover, notably the grandson was financially dependent on the deceased RRIF annuitant at time of death and the trust provides that the grandson is the sole person beneficially interested in the annuity.

Author: XXXXXXXXXX
Section: 56(1)(d.2), 60(l), 60.011(2)(b), 60.011(3), 75.2, 146.3(5), "designated benefit" in 146.3(1), 146.3(6) to (6.2)

XXXXXXXXXX                                                                                                                                   2016-062734

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in reply to your revised request for an advance income tax ruling, dated XXXXXXXXXX, in respect of the above-noted taxpayers. We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Personal Representative of the Estate, none of the proposed transactions and/or issues involved in the Ruling request are the same as or substantially similar to transactions and/or issues that are:

a.    in a previously filed tax return of the taxpayer or a related person;

b.    being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;

c.    under objection by the taxpayer or a related person;

d.    the subject of a current or completed court process involving the taxpayer or a related person; or

e.    the subject of a Ruling previously considered by the Directorate.

In this letter, unless otherwise indicated, all statutory references are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the “Act”), and all terms and conditions used in this letter that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Facts

1.    XXXXXXXXXX (the “Annuitant”) died on XXXXXXXXXX. The Annuitant’s Social Insurance Number (“SIN”) was XXXXXXXXXX.

2.    XXXXXXXXXX (the “Grandson”) is the Annuitant’s grandson. He was born in XXXXXXXXXX.

3.    Immediately before she died and at all other material times referred to in this letter, the Annuitant and the Grandson were resident of Canada.

4.    By the Annuitant’s Last Will and Testament (the “Will”), XXXXXXXXXX (the “Personal Representative” and “Son” of the Annuitant) was appointed to act as the Annuitant’s executor, personal representative and trustee for any trust created by the Will. Probate of the Will was granted on XXXXXXXXXX.

5.    Under the Will, the Grandson’s share of the estate of the Annuitant (the “Estate”) is XXXXXXXXXX of the residue of the Estate left after making bequests of personal property to named individuals and paying debts, expenses and taxes. The Grandson’s share is to be held by the Personal Representative in a separate trust (the “Trust”) for the exclusive benefit of the Grandson until he attains XXXXXXXXXX years of age, subject to the Personal Representative's discretion to encroach for the Grandson’s maintenance, education, benefit and advancement in life.

6.    The Will provides the Personal Representative with discretionary power to allocate assets in kind for payment of any share of a beneficiary and to make decisions regarding matters under the Act.

7.    Included in the assets of the Estate are two registered retirement income funds (“RRIF 1” and “RRIF 2”) having a fair market value as of the date of death of $XXXXXXXXXX and $XXXXXXXXXX, respectively. These amounts were included in the Annuitant’s income for the XXXXXXXXXX taxation year pursuant to subsections 146.3(5) and (6) of the Act.

8.    RRIF 1 and RRIF 2 were wound-up on XXXXXXXXXX 2016 at which time the proceeds were received by your firm on behalf of the Personal Representative in the amount of $XXXXXXXXXX for RRIF 1, and $XXXXXXXXXX for RRIF 2. No other payments were made from the RRIFs after the death of the Annuitant.

9.    The minimum amount for 2016 was $XXXXXXXXXX for RRIF 1, and $XXXXXXXXXX for RRIF 2.

10.   It is expected that the Grandson’s share of the Estate will be approximately $XXXXXXXXXX after funeral and testamentary expenses but before taxes.

11.   The Grandson’s parents were incapable of caring for him. XXXXXXXXXX and placed in the Annuitant’s custody. He lived with the Annuitant and she provided financially for all his needs.

12.   The Annuitant was appointed as the Grandson’s guardian by an order of the XXXXXXXXXX. At the same time, the Court made a parenting order that gave the Grandson’s mother XXXXXXXXXX. The parenting order provided that the Annuitant would have day to day care of the Grandson, and stated that all powers, responsibilities, entitlements of guardianship and decision-making regarding the Grandson would be the sole responsibility of the Annuitant.

13.   To the best of the Personal Representative’s knowledge, information and belief, neither of the Grandson’s parents provided any financial support for him after he went to live with the Annuitant in XXXXXXXXXX, and from that point forward, the Grandson was solely financially dependent on the Annuitant for all his material needs. The Grandson has never had any income for income tax purposes.

14.   XXXXXXXXXX.

15.   XXXXXXXXXX.

16.   On XXXXXXXXXX, when it became clear that the Annuitant was not going to recover, she signed a XXXXXXXXXX to permit the Son and his wife to commence adoption proceedings for the Grandson. As a result of her signing this form, the Annuitant, the Son and his wife became joint guardians of the Grandson. The Annuitant remained as a guardian right up to the time of her death, XXXXXXXXXX.

Proposed transactions

17.   The Personal Representative will allocate the Grandson’s entire bequest out of the proceeds of RRIF 1 and RRIF 2. The bequest will constitute XXXXXXXXXX% of the net value of the Estate and approximately XXXXXXXXXX% of the combined value of the RRIFs.

18.   The Personal Representative and the Grandson will jointly designate all or part of the amounts received by the Personal Representative from RRIF 1 and RRIF 2 in 2016 to be a designated benefit of the Grandson. The joint designation will be made by the Personal Representative and the Grandson filing a completed form T1090 for each RRIF in 2016 with the Canada Revenue Agency. The total amount that will be designated as a designated benefit for RRIF 1 and RRIF 2 will be more than (i) $XXXXXXXXXX (the sum of the cost of the annuity and the total of the minimum amount for XXXXXXXXXX under RRIF 1 and RRIF 2), and (ii) less than the Grandson’s share of the Estate of approximately $XXXXXXXXXX. The exact amount within this range will be determined by the Estate’s accountant.

19.   The Personal Representative, as trustee of the Grandson’s share of the Estate, will purchase in 2016 an annuity from a licensed annuities provider that meets the conditions of paragraph 60.011(2)(b) of the Act (the “Annuity”), as follows:

*     the Trust will be the annuitant under the Annuity;

*     the Grandson will be the sole person beneficially interested in amounts payable under the Annuity;

*     the Annuity will be for a term not exceeding 18 years minus the Grandson’s age in whole years at the time it is acquired; and

*     in the event of the Grandson’s death, any amounts that would otherwise be payable after his death will be commuted to a single payment.

20.   The amount to be paid to acquire the Annuity will be $XXXXXXXXXX.

21.   The Grandson will elect in his 2016 income tax return to have paragraph 60.011(3)(b) of the Act apply to the amount paid to acquire the Annuity for the purpose of paragraph 60(l) of the Act.

Purpose of the proposed transactions

The purpose of the transactions is to reduce the taxes resulting from the Annuitant's death to the minimum allowable by the law by shifting the tax burden to the Grandson and spreading the realization of the tax burden over XXXXXXXXXX years during which the Grandson will be able to shelter much of the income with his personal deduction, while at the same time maintaining control of the capital and income of the Estate so it can be administered in accordance with the Annuitant's wishes.

Rulings

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A.    The amount jointly designated for each RRIF in accordance with paragraph 18 will be a designated benefit of the Grandson as that term is defined in subsection 146.3(1) of the Act and will be included in the Grandson’s income for the 2016 taxation year pursuant to paragraph 56(1)(t) and subsections 146.3(5) and (6.1) of the Act.

B.    The amount included in the Grandson’s income in accordance with Ruling A may be deducted, to the extent permitted by subsection 146.3(6.2) of the Act, from the amount deemed to have been received by the Annuitant from the RRIFs pursuant to subsection 146.3(6) of the Act. The Personal Representative will be entitled to request a reassessment of the Annuitant’s XXXXXXXXXX income tax return to reflect this deduction.

C.    The Grandson will be entitled to deduct from his income for the 2016 taxation year the amount paid by the Personal Representative to acquire the Annuity to the extent permitted under paragraph 60(l) of the Act.

D.    Provided the Grandson is alive at the time of payment, the amount of each payment out of or under the Annuity will be included in the Grandson’s income for the taxation year in which the payment was made, and not included in the Trust’s income, pursuant to paragraph 56(1)(d.2) and section 75.2 of the Act.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the Canada Revenue Agency provided that the Annuity is purchased on or before December 31, 2016.

This letter is based solely on the facts and transactions described above. The documentation submitted with your request that is not described above does not form part of the facts and transactions and any references to the documentation are provided solely for the convenience of the reader.

Yours truly,

for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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