8 September 2011 Internal T.I. 2011-0402391I7 - Insolvent Estate of a Deceased RRSP Annuitant

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What recourse is available to collect the tax attributable to an RRSP when the estate of the deceased annuitant is insolvent and the beneficiary under the RRSP resides outside of Canada?

Position: No recourse is presently available.

Reasons: When the estate of the deceased annuitant is insolvent, recourse is available against the beneficiary pursuant to subsection 160.2(1). However, where the beneficiary resides outside of Canada, payment of the assessment under that provision cannot be enforced due to the bar under the revenue rule exception to comity. The bar does not apply in countries that have entered into a tax collection treaty with Canada. The trustee of the RRSP could, before paying monies over to a beneficiary, be required to obtain a clearance certificate under subsection 159(2) indicating that all taxes owing by the deceased annuitant have been paid. Such a position, however, would be untenable given the economic havoc and unreasonable delays it would create in the distribution of amounts out of RRSPs. Were there to be an administrative policy to restrict the application of subsection 159(2) only to those cases where the beneficiaries are non-residents, the administrative burden and delays would be greatly reduced.

								September 8, 2011

	Winnipeg Tax Services Office			HEADQUARTERS
	Taxpayer Services & Debt Management		Income Tax Rulings
								Directorate
	Attention:	Rick Charles, Manager		Richard Aronoff
		Revenue Collections			(613) 941-7239

								2011-040239

Collection from a Non-Resident Beneficiary of an RRSP

This is in response to the inquiry from Gail Barss concerning a situation where upon the death of the annuitant, the property in a registered retirement savings plan (“RRSP”) was distributed to a designated non-spousal beneficiary, who resides outside of Canada, and there is no money in the estate to pay the related income tax.

In the absence of a beneficiary, who was a spouse or common-law partner of the annuitant, subsection 146(8.8) of the Income Tax Act (the “Act”) provides for income inclusion to the extent that an amount equivalent to the fair market value of the property in the RRSP is deemed to have been received by the annuitant immediately before his or her death. The estate of the deceased annuitant has the primary responsibility for the payment of tax resulting from the income inclusion under subsection 146(8.8), see Curley v. MacDonald, [2000] 4 C.T.C. 14, 2001 DTC 5141 (Ont. S.C.J.). However, where the estate is insolvent, the designated beneficiary is jointly liable under subsection 160.2(1) for the payment of the annuitant’s tax.

By operation of subsection 160.2(1) of the Act, a beneficiary who receives a benefit out of an RRSP of a deceased annuitant, is jointly and severally liable for the portion of the annuitant’s tax that is attributable to the amount of the benefit received. A difficulty with the operation of subsection 160.2(1) arises where the beneficiary resides outside of Canada. But for the requirement to withhold under paragraph 212(1)(l) to the extent that the amount has not already been taxed in the hands of the deceased annuitant, the Act does not provide for withholdings from the amount received by a designated beneficiary. Moreover, where the benefit is received by a non-resident beneficiary, there is no requirement for a clearance certificate similar to that which would be required under subsection 116(2) of the Act in respect of a proposed disposition.

The fact that a designated beneficiary is a non-resident does not preclude the imposition of liability under subsection 160.2(1); however, the payment of the liability cannot be enforced. It is well established under the revenue rule exception to comity that the courts of one country will not directly or indirectly enforce the revenue laws of another country, see U.S.A. v. Harden, [1963] C.T.C. 450, 63 DTC 1276 (S.C.C.); The Queen in Rt. of B.C. v. Gilbertson, 597 F.2d 1161 (9th Cir. 1979); and A.G. Can. v. R.J. Reynolds Tobacco Holdings Inc., 268 F.3d 103 (2nd Cir. 2001). The only exception to the strictures of the rule is where there is a tax collection treaty between the two countries.

The remaining issue is whether under subsection 159(2) the trustee of an RRSP is required, before distributing the property of the trust, to obtain a clearance certificate, certifying that all amounts for which the annuitant is liable under the Act have been paid or security for the payment thereof has been provided. Ms Barss makes reference to interpretation E9305255 and asks whether the position taken therein supports the aforementioned proposition. It should be noted that the foregoing interpretation relates to the personal liability of the trustee for unpaid taxes owed by the RRSP trust: see subsection 207.1(1), which imposes a tax on an RRSP trust in respect of a non-qualified investment. The foregoing interpretation, while not on point, does not rule out the possible application of subsection 159(2) in the circumstances where an estate is without sufficient assets to pay the tax attributable to income inclusion under subsection 146(8.8).

In this regard, subsection 159(2) of the Act requires the legal representative of a taxpayer to obtain a clearance certificate prior to making a distribution of any property of the taxpayer that is in the possession of the legal representative or under his or her control. The clearance certificate would certify that all amounts for which the taxpayer is liable under the Act as well as those amounts for which the legal representative is liable in a representative capacity, have been paid or security for the payment thereof has been provided. Subsection 159(2) applies to the executor or trustee of an estate by virtue of the definition of “legal representative” contained in subsection 248(1) of the Act.

Under subsection 159(3) a legal representative, who distributes the property of the taxpayer without obtaining a clearance certificate pursuant to subsection 159(2), is personally liable for the amounts in respect of which the certificate would have been issued, but only to the extent of the value of the property distributed. Where the estate of a deceased annuitant is without sufficient assets, and the property in an RRSP has been distributed directly to a designated non-spousal beneficiary, the legal representative of the estate is not liable under subsection 159(3).

The definition of “legal representative” in subsection 248(1) includes a trustee, who is otherwise dealing in a fiduciary capacity with property that is or was for the benefit of a taxpayer. Osborn’s Concise Law Dictionary (11th ed.) defines distribution as the division of trust property among the beneficiaries. The decision in Chan v. The Queen, [2000] 1 C.T.C. 2022, 99 DTC 1215 (T.C.C.) supports the view that a distribution is an action taken by a trustee in response to a fiduciary duty. Subsection 159(2) allows for the possibility that the distribution may be made to one or more persons; see also: Stursberg v. The Queen, [1993] 2 C.T.C. 76, 93 DTC 5271 (F.C.A.), where it was held that there can be a distribution in which there is only one beneficiary. In the context of a beneficiary’s liability under subsection 160.2(1), it should be noted that subsection 152(3) provides that liability for tax is not affected by the fact that no assessment has been made, see also The Queen v. Simard-Beaudry Inc., 71 DTC 5511 (F.C.T.D.). Accordingly, where an estate is insolvent, it follows that a designated beneficiary, who is liable under subsection 160.2(1), would also be a taxpayer for the purposes of subsection 159(2).

Based on a literal interpretation of subsection 159(2) and the definition of “legal representative” in subsection 248(1), the trustee of an RRSP is required, before distributing the property of the trust, to obtain a clearance certificate, certifying that all amounts for which the annuitant is liable under the Act have been paid or security for the payment thereof has been provided. However, it is recognized that such an interpretation would create economic havoc and unreasonable delays in the distribution of amounts out of RRSPs. The courts would very likely take a contextual and purposive approach to interpreting those provisions, see Canada Trustco Mortgage Co. v. The Queen, [2005] 5 C.T.C. 215, 2005 DTC 5523 (S.C.C.), and find that the provisions do not apply to such broad circumstances.

The existence of an administrative policy providing that subsection 159(2) would only be applied to a trustee of an RRSP in circumstances where the beneficiary was a non-resident, would greatly reduce the administrative burden and delays in the distribution of amounts out of RRSPs. However, the formulation of such a policy is outside the mandate of the Income Tax Rulings Directorate. In this regard, the matter would need to be referred to the appropriate functional programs area. Meanwhile in the absence of such an administrative policy, the provisions of subsection 159(2) and (3) do not generally apply as against the trustee of an RRSP.

Should you have any questions or require additional information, please do not hesitate to telephone Richard Aronoff at the number provided at the outset of this memorandum.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate

cc. Mr. Michael Snaauw
A/Deputy Assistant Commissioner
Taxpayer Services and Debt Management Branch

cc. Gail Barss
Team Leader
Taxpayer Services and Debt Management
Winnipeg TSO