2020-0867001E5 RRIF - successive deaths

Principal Issues: Whether an amount paid out of a RRIF to the estate of a surviving spouse can be a designated benefit?

Position: No

Reasons: The amount has to be paid to the surviving spouse while the spouse is alive.

Author: Schnitzer, Irina
Section: 104(6)(a.2), 146.3

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                                                                                                                            2020-086700    
                                                                                                                            I. Schnitzer

March 12, 2021

Dear XXXXXXXXXX:

Re: RRIF - Successive deaths of the last annuitant and surviving spouse

This is in reply to your correspondence dated October 18, 2020, wherein you requested our views on the income tax consequences arising from the death of the last annuitant of a trusteed registered retirement income fund (“RRIF”) where the sole designated beneficiary under the RRIF, who was the annuitant’s spouse, died before having received the RRIF proceeds. The annuitant died in 2018, the spouse died in 2019 and the RRIF proceeds were distributed to the spouse’s estate in 2020.

In particular, you would like our views on who is responsible for paying the income tax on the following amounts:

*    the fair market value of the RRIF property on the date of the annuitant’s death; and

*    the appreciation in value of the RRIF property from the date of the annuitant’s death to the date the proceeds are paid to the spouse’s estate.

We also acknowledge receipt of the additional information provided by telephone and email.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation . It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

When the last annuitant of a RRIF dies, the annuitant is deemed to have received, immediately before death, an amount equal to the FMV of all the property held in the RRIF at the time of death. This amount is generally included in the income of the annuitant in the year of death. However, the amount of the income inclusion may be reduced if the RRIF proceeds are paid to a qualifying survivor as a designated benefit. It can also be reduced if the RRIF proceeds are paid to the deceased annuitant’s estate, and the deceased annuitant’s legal representative and a qualifying survivor jointly elect to treat some or all of it as being paid to the qualifying survivor as a designated benefit. In such cases, the designated benefit is included in the income of the qualifying survivor. Only the spouse or common-law partner or a financially dependent child or grandchild can be a qualifying survivor. Further, the qualifying survivor must be alive at the time the amount is paid to the qualifying survivor or, if applicable, at the time the joint election is made.

In the situation you described, the RRIF proceeds were paid out after the spouse’s death. Consequently, the payment is not a designated benefit. The FMV of the RRIF property at the time of the annuitant’s death must be included in the annuitant’s income for 2018 without being able to deduct any amount paid to the spouse’s estate.

Generally, subject to certain exceptions, no tax is payable by a trust that is governed by a RRIF. When the last annuitant of a RRIF dies, the RRIF trust’s tax-exempt status is extended until the end of the year immediately following the year of death. This period is commonly referred to as the “exempt period”.  If a RRIF trust is still in existence after the exempt period, the trust will become taxable from that point forward under normal trust rules. A RRIF trust may claim a deduction in computing its income for any income earned after the exempt period that is actually paid to a beneficiary of the trust. A RRIF trust reports its taxable income annually in the T3 Trust Income Tax and Information Return, for all years after the end of the exempt period. 

In the situation you described, we have assumed that the RRIF trust will fully deduct in computing its 2020 income any income it earned in 2020 that was paid to the spouse’s estate and therefore will not be subject to any tax.  In this case, the spouse’s estate will include in computing its income for 2020 the amount it received out of the RRIF in 2020 less the portion that is included in the annuitant’s income for 2018.

In other words, the increase in value of the RRIF property between the date of the annuitant’s death and the date the property is distributed to the spouse’s estate is included in the income of the spouse’s estate for 2020 and the FMV of the RRIF property at the date of the annuitant’s death is included in the annuitant’s income for 2018.

Additional information regarding the income tax consequences of the death of an annuitant under a RRIF can be found in RC4178 Death of a RRIF Annuitant or a PRPP Member and T4079 T4RSP and T4RIF Guide available on the www.canada.ca website.

We trust that our comments will be of assistance.

Yours truly,

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

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