Refund of Premiums When preparing the deceased’s terminal return, the executor may claim a deduction for a “refund of premiums”, which generally is equal to the RRSP funds passed to the deceased’s surviving spouse (common-law partner) or a financially-dependent child or grandchild.
Refund of premiums treatment requires that the spouse or child receive the RRSP proceeds as a named beneficiary of the plan. However, where the proceeds pass to the deceased’s estate, and the spouse or child would receive the funds from the estate under the terms of the will, the executor and the spouse or child can jointly elect to have refund of premiums treatment apply.
The Canada Revenue Agency (CRA) has indicated in a technical interpretation that an individual may have two spouses for the purposes of the definition of “refund of premiums” – a married spouse from whom the deceased was separated but not divorced, and a common-law partner.
A child or grandchild is defined to be financially dependent on the deceased at the time of death if that child ordinarily resided with and was dependent on the deceased. The child’s net income for the previous year is generally required to be less than the basic personal amount ($11,138 in 2014). For children with a physical or mental impairment, net income must be less than the combined basic personal amount and the disability amount ($11,138 and $7,766 = $18,904 in 2014). Note that these dollar limits are rebuttable – in other words the taxpayer can argue that a child with income higher than the stated limits was in fact still financially dependent on the deceased person in the particular facts and circumstances. Also note that the child cannot also be financially dependent on someone other than the deceased or refund of premiums treatment will not be available.Any portion of the RRSP proceeds paid on death that qualifies as a “refund of premiums” is deductible by the executor as an offset of the deceased’s RRSP income inclusion. The recipient beneficiary is taxable on the receipt of those RRSP proceeds to the extent of the deduction claimed on the terminal return. In some circumstances, options are available to qualifying beneficiaries that allow them to shelter the income.
• The beneficiary spouse or common-law partner can transfer amounts received into an RRSP, registered retirement income fund (RRIF), or a registered annuity under which he or she is the annuitant. If the beneficiary is over age 71, the transfer must be to a RRIF or registered annuity. Effectively, the registered funds are rolled over by the survivor and income tax is deferred.
• In the case of a qualifying child or grandchild who is financially dependent by reason of mental or physical infirmity, the proceeds can be transferred into a registered plan under which the child is the annuitant. In addition, he or she has the option to transfer the funds into a registered disability savings plan (RDSP).
• In the case of a qualifying financially dependent child or grandchild under the age of 18, the funds can be transferred to a registered term certain annuity payable to age 18.
Change in Value To the extent the value of the assets held within the RRSP increases or decreases between the date of death and the time the executor liquidates the account, an adjustment is available. Should the account decline in value, a deduction from the fair market value at date of death can be claimed on the deceased’s final return. This is reasonable as it results in an inclusion of the true realizable amount. In general terms, the RRSP issuer completes and signs the CRA form (RC249) at the time the RRSP is distributed. The executor sends the completed RC249 to the CRA with a letter requesting an adjustment to the deceased’s terminal return.
To be eligible for the deduction, the account is to be distributed by the end of the year following death. The executor may apply to the Minister requesting the deduction be permitted beyond the standard period. The Minister has the right to waive this time limitation. It would seem reasonable that exceptional circumstances would be given consideration. The decline in value deduction is not available where the RRSP plan holder’s spouse or common-law partner is named as the sole beneficiary of the plan.
Similarly, should the account increase in value, a T-slip (T4RSP) is issued for the difference and must be reported on the beneficiary’s or estate’s return (depending on who is entitled to receive the growth amount).
The income tax liability associated with an RRSP upon the plan holder’s death is quite significant. Understanding the options can lead to a more optimal outcome.