Income Tax Liability and Registered Retirement Plans…Who is Responsible?

It’s common for investors who own registered retirement plans, such as RRSPs and RRIFs, to designate a beneficiary under their plan.  Disputes often arise when the investor dies and due to the deemed realization rule, income tax liability is triggered.   The dispute often surrounds the question of who is ultimately liable for the tax assessed by Revenue Canada in relation to the deemed realization of the registered retirement plan?

In an Ontario Superior Court of Justice decision, Banting v. Saunders Estate, the Honourable Justice Lofchik considered whether it was the estate or the recipients of the registered retirement  plan that were ultimately liable for the taxes triggered upon the deemed realization of the plans.

In Banting, the Deceased died in October 1997, and was survived by her five adult children. The Deceased left a will dated November 12, 1987 (the “Will”) in which she appointed two of her children as estate trustees.

Under the terms of the Will, the Deceased left the Applicant/friend the Estate’s share in a numbered company and the residue of the Estate is divided equally among her five adult children.  At the date of the hearing, the assets of the Estate composed of the following:

Value of shares in 728377 Ontario Limited	$ 362,000
Cash	$ 77,234
Personalty	$ 20,000
Total	$459,234

The Deceased also held three registered retirement plans totaling approximately $542,000 (the “Plans”) and the Plans were left to the Deceased’s five children equally as designated beneficiaries.  The tax liability resulting from deemed realization of the Plans amounted to approximately $289,000; however the liability had been outstanding for over a year so the amount claimed by Revenue Canada at the date of the hearing was $322,998.77. 

The Applicant/friend argued that the resulting income tax liability on the deemed realization of the Plans should be the responsibility of the five recipient children.  Clearly, the Applicant/friend would be paying the lion’s share of the taxes if it was ruled that the taxes ought to be paid by the Estate, as the Applicant/friend was the sole beneficiary of the shares in the numbered company.  By contrast, the five children, who are the residuary beneficiaries of the Estate, argued that the liability ought to be an obligation of the Estate. 

Section 146(8) of the Income Tax Act, has the effect of including the value of the proceeds of the Plans in the Deceased’s income at the time of death; however the court focused on whether or not the proceeds of the Plan were assets of the estate and if so, how liability would be borne among the beneficiaries?

The Applicant/friend argued that section 160(2) of the Income Tax Act, which provides that the tax payer (presumably the estate in this case) and the designated recipient of proceeds of the deceased’s Plan are jointly and severably liable for taxes owing as a result of the payment of the Plan and it should be the recipients of the proceeds from the Plans that should satisfy the outstanding income tax obligations.

In his decision, the Honourable Justice Lofchik considered the decision Clark Estate v. Clark (1997), 15 E.T.R. (2d) 113 (Man. C.A.) and ultimately followed it, wherein the court held that the registered retirement plans are not assets of the estate but nevertheless they are subject to the claims of general creditors of the Deceased’s estate whose claims cannot be met by the estate itself because of insufficient assets.

The effect of this decision and all the others which have followed it, places the income tax liability triggered from registered retirement plans on the estate to the extent that there are sufficient assets in the estate to satisfy this liability.  In the event that there are insufficient assets in the estate to cover all liabilities, the beneficiaries of the registered retirement plan may be called upon to satisfy this obligation.

Thank you for reading,

Rick Bickhram