Tag: registered retirement savings plan

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RRSP BENEFICIARY: OUR REMARKABLE PLAN ON HOW THE INCOME TAX BILL ON DEATH FROM AN RRSP CAN BE REDUCED

rrsp beneficiary
rrsp beneficiary

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Ira Smith Trustee & Receiver Inc. and Smith Estate Trustee Ontario are absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom and click play on the podcast.

RRSP beneficiary: Death of an RRSP annuitant

As I have written before, in addition to insolvency work, we also act as an independent Estate Trustee through our business Smith Estate Trustee Ontario. In our work as Estate Trustee of a deceased estate, we have come across an interesting topic when it comes to the will of the deceased and the inheritance of an RRSP beneficiary.

Understanding the tax implications of a beneficiary entitled to an RRSP inheritance can save or cost you thousands of dollars depending on how the RRSP is administered. The Canada Revenue Agency (CRA) has specific rules regarding what happens to an RRSP when its owner dies. Did you know that there are a number of tax implications that come with inheriting RRSPs? This is especially true when you are inheriting from distant relatives like grandparents, aunts, uncles, or cousins. As an assignee of a Registered Retirement Savings Plan (RRSP), you are entitled to all of the funds in the plan, but it is possible that the account balance could be taxable.

In this Brandon Blog, I discuss the income tax ramifications on an RRSP beneficiary. By definition, since it is an RRSP available to be inherited, rather than a Registered Retirement Income Fund (RRIF) or an annuity, I am talking about:

  • someone who died before turning 72 years old; and
  • never had the opportunity to enjoy retirement.

I remind you that I am not an income tax practitioner, but rather, I am a licensed insolvency trustee. So this Brandon Blog is not meant as income tax advice and should not replace the advice of your qualified income tax advisor.

RRSP beneficiary designation: Designating your estate or other beneficiaries

Setting up an RRSP is a great way to save for retirement. You contributed to your plan each year and got a tax break from the government. This is a fantastic deal, so many people take advantage of it. If you only name the heir or heiress in your will, that should be sufficient. However, a will can be challenged. If you don’t name one at all for your plan, or if you are not a special type of grantee, there can be some serious tax implications.

The inheritor you name for your RRSP during your lifetime is the person who will receive the asset after your death. You can appoint a recipient directly in your RRSP plan document much in the way that you name one for your life insurance policy. I recommend that you do this. Do not just name your estate and then maybe name the real RRSP beneficiary in your will.

The CRA has adopted a special policy regarding the tax treatment of RRSPs. This policy is referred to as the deemed disposition rule. The deemed disposition rule applies to RRSPs. When the holder of an unmatured RRSP passes away, CRA deems that the RRSP was disposed of and the funds received, right before their death.

The calculation of the funds received is an amount equal to the reasonable market price of all the property kept in the RRSP at the time of death. This amount and any other balances the deceased got from the RRSP in the year of death need to be reported on the deceased’s year of death income tax return.

rrsp beneficiary
rrsp beneficiary

RRSP beneficiary tax implications: How can the income tax bill on death be reduced?

Understanding the tax implications of an RRSP beneficiary entitled to an RRSP inheritance can save or cost you thousands of dollars depending on how the RRSP is administered. The CRA has specific rules regarding what happens to an RRSP when its owner dies.

When a person passes away and leaves an RRSP, their estate has to pay the income tax liability on the RRSP when it’s paid to the RRSP beneficiary. However, you should first ask who is a qualified beneficiary? Eligible individuals who can qualify for such beneficiary designations are a spouse, a common-law partner, or a financially dependent (infirm) child or grandchild, they can utilize the “qualified beneficiary” RRSP exemption to reduce or remove the tax obligation. If there is no qualified beneficiary, the Estate Trustee will have to pay income tax calculated based on the entire amount of the RRSP.

So the challenges for beneficiaries, in general, are twofold: 1. Are you a qualified beneficiary? 2. Can a qualified beneficiary reduce their income tax bill?

If you inherit an RRSP, is that someone will face a tax bill from CRA on the deemed disposition on death. The RRSP value will be taxed as income. Now, there are some situations in which you can reduce or eliminate the taxes. If the RRSP beneficiary is a qualified beneficiary, then the value of the RRSP can be taxed in the hands of the RRSP beneficiary, not the deceased’s estate.

RRSP beneficiary tax: Reduce the tax by rolling over

This first step of the rollover procedure is described as a “refund of premiums”. The second step is the tax-deferral portion. Where a qualified beneficiary adds the number of assets from the deceased’s RRSP in the year received (or within the first 60 days of the next year), the qualified beneficiary can declare a tax deduction under section 60(l) of the Income Tax Act (Canada) to eliminate the RRSP amount added to their income. This manoeuvre does not require the RRSP beneficiary to have sufficient RRSP contribution room. The result? This heir or heiress becomes a successor annuitant and gets a tax-deferred rollover.

To eliminate the tax on receipt of the RRSP funds, the RRSP assets are directly moved to the qualified beneficiary‘s RRSP. At tax time, the qualified beneficiary gets a T4RSP tax slip. The qualified RRSP beneficiary then includes the date-of-death RRSP amount in their taxable income but offsets it with a section 60(l) tax reduction.

The above rollover is typically seen when a qualified beneficiary is marked as the RRSP recipient. When this happens, the RRSP proceeds generally bypass the deceased’s estate, lowering probate fees (where applicable) and side-stepping the estate creditors as well as the need for complicated estate settlements.

rrsp beneficiary
rrsp beneficiary

CRA RRSP beneficiary rules: Who pays tax on inherited RRSP if the beneficiary is not a spouse, common-law partner or financially dependent children or grandchild – but is the Estate?

One of the most common errors made when determining the recipient for the RRSP is to assign the estate itself. This requires the RRSP asset to go through probate. The estate receives the tax-deferred growth that has actually been earned by the RRSP up to the date of death. However, it would additionally mean that the estate would be responsible for shouldering the tax burden on the distribution of the RRSP. This is not necessarily wrong, but from an estate planning perspective, it is the most expensive route to choose. Estate planners certainly would not choose this way unless for some reason there was no other choice.

The RRSP beneficiary problem we are dealing with or how to destroy an inheritance

The issue we are dealing with on a particular deceased estate file blends insolvency work with the work of an Estate Trustee. The deceased did not file income tax returns for the last few years of her life. We now have a pretty good handle on her income taxes and what her liability is for the years of unfiled tax returns, as well as the tax liability that will arise from the Estate trust tax return.

Based on what I have already told you about the taxation possibilities for an RRSP beneficiary, and what I am about to tell you, there is a huge problem for an RRSP beneficiary.

For confidentiality reasons, I cannot provide names and amounts, but I will explain the problem. The deceased maintained a self-directed RRSP contract through Royal Bank of Canada at Royal Bank Dominion Securities. The named beneficiary in the Registered Retirement Savings Plan document was a relative. This relative does not meet the definition of a qualified beneficiary.

So in the normal course, the Estate Trustee would work with the RRSP beneficiary to understand if there was going to be no taxable income inclusion because an RRSP rollover was taking place. If not, the estate should pay the tax, but the beneficiary obtains 100% of the value of the RRSP.

Another option is that the Estate Trustee would get the tax payable on the registered retirement income from the RRSP beneficiary and pay the income tax. The beneficiary would be left with the net amount and the tax would be paid. So everyone is square.

Which option is picked depends on if there are more assets and more beneficiaries or not.

In the situation I am acting in, the Estate is insolvent. There will not be enough money in the Estate to pay all the income tax owing, regardless of the source of the taxable income. The RRSP beneficiary also as I understand it, did not elect an RRSP rollover.

So now, in this case, where the Estate has insufficient funds to pay the taxes payable in full and the RRSP beneficiary:

  • is not a qualified beneficiary; and
  • did not do an RRSP rollover

the RRSP beneficiary will be liable for the income tax payable from the RRSP plan assets received. The real problem is that the year death, and therefore the year the RRSP beneficiary received their inheritance was 2018. We were appointed late in 2019 and we just now have been able to quantify the income tax payable.

So it will be 2021 or later that CRA may go to the RRSP beneficiary with their hand out. I don’t know if the RRSP beneficiary invested it all, spent it all, or a combination of the two. This my readers is how to destroy an inheritance.

RRSP beneficiary summary

I hope you enjoyed the RRSP beneficiary Brandon Blog post. If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

Ira Smith Trustee & Receiver Inc. and Smith Estate Trustee Ontario are absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

 

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RESP CONTRIBUTION NOT PROTECTED IN BANKRUPTCY

resp contribution
resp contribution

If you would prefer to listen to the audio version of this RESP contribution not protected in bankruptcy Brandon’s Blog, please scroll down to the bottom and click on the podcast

Introduction

Many parents contribute to a Registered Education Savings Plan (RESP) to save for their children’s post-secondary education. Unlike a Registered Retirement Savings Plan (RRSP), an RESP contribution, or the total of all contributions made by the parent(s), is subject to seizure in the bankruptcy of the owner of the RESP.

In Brandon’s Blog, I discuss the history of why an RRSP is largely exempt from seizure in a bankruptcy, while a Registered Disability Savings Plan (RDSP) and an RESP are not. The rules governing whether an RRSP or Registered Retirement Income Fund (RRIF), RDSP or RESP are exempt from seizure or not is an interplay between both federal and provincial laws. As I practise in the province of Ontario, I will speak only about the Ontario situation.

resp contribution
resp contribution

RRSP or RRIF exemption

Before 2008, whether an RRSP was exempt from seizure or not relied solely upon provincial law. There was no federal law which outlined the treatment for an RRSP in bankruptcy. Effective July 2008, the assets contained in either an RRSP or a RRIF were codified in the Bankruptcy and Insolvency Act (Canada) (BIA) to be exempt from seizure, except for contributions made to an RRSP in the 12 months prior to the date of bankruptcy.

The only exception would be based on whether or not RRSPs and RRIFs were exempt from seizure under provincial law. So, in the case of Ontario, the 12-month clawback exists. The bankrupt has to pay the equivalent of the contributions made in the 12 months before the date of bankruptcy.

The reason for making this change to the BIA was because there was an inequality amongst RRSPs. If you held your RRSP at a financial institution, then it was not exempt from seizure in a bankruptcy. However, if you held your RRSP:

  • with an insurance company; AND
  • you had made an irrevocable designation that in the event of your death, the beneficiary of your plan was a spouse, child, parent or grandchild

then under the Ontario Insurance Act the entire RRSP or RRIF was exempt from seizure.

The amendment to the BIA was done for two main reasons:

  • to put all RRSPs and RRIFs on the same footing, regardless of what institution it was held with; and
  • in order to not be destitute in their fresh start that the bankruptcy system allows them to have, retired Canadians who had to go bankrupt should not lose what was probably their single largest source of retirement income as a result of their financial problems.

So before the July 2008 amendment, people who were going to file for bankruptcy and who had a sizeable RRSP held with a chartered bank, would transfer the RRSP to an insurance company and make the required beneficiary designation. Many cases were heard in bankruptcy Courts across Canada.

If the beneficiary in an insurance policy, including the RRSP or RRIF investments, was revocable, it was held that the licensed insolvency trustee (then called a bankruptcy trustee) could revoke the named beneficiary, replace it with designating the Estate as the beneficiary, and then collapsing the plan to obtain the funds.

If the beneficiary was irrevocable, then the Trustee could not collapse the investment. Rather, it would have to be 1 of the reasons why a Trustee would oppose the bankrupt’s discharge. The reason being is that the person, knowing themselves to be insolvent, transferred an asset out of the creditors’ reach for no value obtained. This was called a settlement.

The leading case which was subsequently followed by other Courts, including Ontario, was The Court of Appeal for Saskatchewan case Royal Bank of Canada v. North American Life Assurance Co., 1994 CanLII 4696 (SK CA) which became known as the Ramgotra case.

The reason is that Dr. Ramgotra was bankrupt. Royal Bank was a creditor and obtained Court approval to appeal, in lieu of the Trustee, a lower Court decision on what should happen to the RRSP, turned into an RRIF, funds. The Court of Appeal determined that since Mrs. Ramgotra obtained an irrevocable interest in the property, notwithstanding the RRSP transfer was a settlement, the Trustee could not obtain the money.

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resp contribution

RDSP and Budget 2019

An RDSP is a financial savings strategy that is planned to assist moms and dads and others build up funds for the long-term financial safety of an individual who qualifies for the disability tax credit.

Unlike RRSPs, the balance kept in RDSPs are not excluded from seizure in a bankruptcy. The reason for this is because the settlor of the RDSP may do an RDSP withdrawal of funds at any time. The theory is that funds will be withdrawn for the welfare of the disabled person. However, it is the ability to withdraw funds at any time, that renders this vehicle to not be a true legal trust.

In Budget 2019, it is proposed that RDSPs be given the identical treatment to RRSPs. The societal aim is to make sure that the needs of a disabled person are not negatively affected due to the financial problems of the person who is looking out for and financially contributing to the welfare of the disabled person. More than likely the contributor is a parent.

Budget 2019 intends to exclude RDSPs from seizure in bankruptcy, except for payments made in the 12 months prior to the date of bankruptcy. This will put in on the same footing as RRSPs.

resp contribution
resp contribution

RESPs are not exempt

The reason that RESP contribution funds are not exempt from seizure in bankruptcy is fairly simple. The child does not obtain property interest in the RESP funds as the parent can collapse the plan any time before maturity. Therefore it is not a trust or any form of transfer of property to the child. Therefore, the Trustee of a bankrupt parent who owns an RESP can collapse it.

If the parent wishes the RESP to continue and not be collapsed, satisfactory arrangements have to be made with the Trustee for the equivalent amount of funds in the RESP as at the date of bankruptcy be paid to the Trustee for the benefit of the bankruptcy Estate and the bankrupt’s creditors.

As a result of perceived inequality, on June 3, 2019, Dan Albas, Conservative MP for Central Okanagan—Similkameen—Nicola (B.C.), introduced as a private member’s bill, Bill C-453, An Act to amend the Bankruptcy and Insolvency Act (property of bankrupt — registered education savings plan). This Bill intends to amend s. 67(1)‍(b.‍3) of the BIA, so that RESPs receive the same treatment as RRSPs and the treatment proposed in Budget 2019 for RDSPs.

The thrust is obviously to make sure that other than for contributions made in the 12 months before the date of bankruptcy, a parent should not lose the RESP benefits for their child’s post-secondary school education because of their bankruptcy.

As private member’s bills rarely become law, I am doubtful that this initiative, no matter how well-meaning, will pass. There may also be a societal distinction between a retiree whose income earning days are behind him or her, a disabled person who is reliant upon a trust set up for their care and benefit and an elementary or high school student’s future university or college tuition.

resp contribution
resp contribution

What about you?

Are you in financial distress? Are you worried about any RRSP, RDSP or RESP contribution? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement?

If so, call the Ira Smith Team today. We have decades and generations of experience assisting people looking for financial restructuring, a debt settlement plan and to AVOID bankruptcy.

As a licensed insolvency trustee, we are the only professionals accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government approved debt settlement plan to do that. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles. Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

resp contribution

 

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WHAT IS THE DIFFERENCE BETWEEN BANKRUPTCY AND INSOLVENCY CANADA

What is the difference between bankruptcy and insolvency Canada: Introduction

Encountering major money troubles is life-shattering, especially if you automatically think that bankruptcy is your only alternative. As a matter of fact, lots of people erroneously think that serious financial difficulties immediately suggest the only answer is bankruptcy. The most common question I am asked is, “what is the difference between bankruptcy and insolvency Canada”.

What is the difference between bankruptcy and insolvency Canada: Insolvency

If you are having problems meeting your financial obligations or have stopped meeting those financial obligations as they come due you are insolvent, not bankrupt. Insolvent is a cash flow problem; bankruptcy is a legal state. You can read a detailed discussion on the definition of being insolvent in my last week’s vlog INSOLVENT DEFINITION: A NEW FOCUS FOR TORONTO BANKRUPTCY TRUSTEE.

Bаnkruрtсу is a legal рrосеѕѕ under the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) that helps you to resolve уоur debts if they have become unmanageable. If you have relatively few assets and low іnсоmе and dесіdе to file for bаnkruрtсу, you will probably fіlе under the streamlined Summary Administration part of the BIA.

If you have realizable assets that will produce a value greater than $10,000, then your bankruptcy would be administered under the general administrative provisions. Don’t worry about these distinctions right now. For now, just know that the summary administration rules are shortened, and the cost of the bankruptcy administration is fixed by a tariff set by the Superintendent of Bankruptcy.

In either case, you will turn over to your Licensed Insolvency Trustee (“LIT”) (formerly known as a bankruptcy trustee) all уоur рrореrtу that is not exempt (protected) by law. The LIT will sell your property and the proceeds will be used to рау for the bankruptcy administration and then make a distribution to уоur сrеdіtоrѕ.

What is the difference between bankruptcy and insolvency Canada: Assets exempt in a bankruptcy in Ontario

In Ontario, where my practice is, the following assets are exempt from seizure in a personal bankruptcy:

  1. Your necessary clothing without any dollar restriction.
  2. Family furnishings and appliances up to a value of $13,150.
  3. Your tools and other personal property used to earn income from your occupation up to a value of $11,300.
  4. One vehicle with equity of no more than $6,600.
  5. Registered Retirement Savings Plan and Registered Retirement Income Fund savings, other than payments made within the 12 months immediately before the bankruptcy filing.
  6. The equity in your house if up to the amount of $10,000. Note that the current thinking is that if your equity is more than $10,000, then your exemption is zero.

If you have very little property, all of it may be рrоtесtеd so that you will not lose it.

What is the difference between bankruptcy and insolvency Canada: Surplus income

How much уоur сrеdіtоrѕ will get in this process dереndѕ on how much уоur unрrоtесtеd property can be ѕоld fоr and whether you will be required to pay “surplus income” to your LIT. For a detailed discussion on surplus income, read my May 28, 2013 blog CAN YOU REALLY HAVE SURPLUS INCOME IF YOU’RE BANKRUPT?

Among all the things that seem to perplex many people when it involves the bankruptcy procedure is surplus income. It’s tough to get your head around the concept of surplus income when you are heading towards bankruptcy. Can that really be true if you are insolvent?

What is the difference between bankruptcy and insolvency Canada: What is surplus income

Surplus income in a bankruptcy describes the amount the bankrupt must pay to the Trustee monthly. The Canadian bankruptcy system attempts to balance your right to end your debt and start over with the rights of creditors to be paid.

To permit Canadians to keep a sensible right to make a living throughout the bankruptcy administration, the federal government has established limits or standards on revenue a person can keep (after tax obligations and certain limited deductions) throughout their bankruptcy. The Office of the Superintendent of Bankruptcy establishes the limit restriction every year tied into the cost of living.

How do you figure surplus income?

The Federal Government establishes the formula used to calculate surplus income payments. The same formula is used for all of Canada.

The limits for surplus income are based off across the country “poverty line”. Surplus income has absolutely nothing to do with what you have left over monthly. It is a federal government formula that considers your revenue, specific non-discretionary costs as well as your household size.

The calculation is to find if you will need to contribute from your earnings monthly to your Trustee, for the benefit of your creditors.

Bankruptcy discharge

The final step of your bankruptcy process will be to get your discharge. Your discharge from bankruptcy acts as the trigger to discharge you from all of your debts. This means that you will not have to рау them (with possibly certain exceptions depending on your circumstances).

Whether you get an absolute discharge from your bankruptcy will depend essentially on your conduct. Before your bankruptcy, did you treat all your creditors the same? Does anyone feel aggrieved by your actions? That will decide if any of your creditors will oppose your discharge.

For an in-depth discussion of the personal bankruptcy discharge process, check out our vlog BANKRUPTCY DISCHARGE: THE TOP 8 THINGS THE BANKRUPTCY COURT WILL CONSIDER ON ANYONE’S BANKRUPTCY DISCHARGE APPLICATION.

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