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Writing a will is a complex endeavour, and it is essential to understand the tax consequences of certain clauses to avoid unpleasant surprises. For example, does a survivorship clause preclude a tax-free rollover of property or a registered plan as a spousal bequest?
Indefeasible vesting
The rollover of property to a spouse or spousal trust upon a taxpayer’s death is an exception to the rule of deemed disposition at fair market value of any property owned by the taxpayer immediately before death.
To benefit from a transfer, several conditions must be met, including the requirement that the property of the deceased be vested indefeasibly to the spouse, or to an exclusive spousal trust, within 36 months following the death.
When a will contains a classic 30- to 60-day survivorship clause, according to the Canada Revenue Agency (CRA), such a clause does not in itself preclude the rollover of property to the spouse, if the latter survives the testator beyond the period stated in the clause. However, the CRA also specifies that, should the spouse die within the period stated in the survivorship clause, the rollover provided by law does not apply, because the bequest would be retroactively transferred to someone else.
Registered plan bequests
Upon the death of a registered plan annuitant, tax-free vesting occurs by virtue of the premium refund concept.
At the time of death, the annuitant of a registered retirement savings plan (RRSP) or a locked-in retirement account (LIRA) is deemed to have received, immediately before death, an amount in the form of a benefit equal to the fair market value of property included in the plan. This amount should be included in the computation of the deceased taxpayer’s income.
Following the death of the registered plan annuitant, insofar as any plan amount is paid to the surviving spouse, child or grandchild financially dependent on the plan annuitant such payment will then constitute a refund of premiums that is deductible in the computation of the deceased taxpayer’s income. The end result will be tax-free vesting.
As for the taxpayer who receives the amount that qualifies as a premium refund, if the amount is transferred into an RRSP or used to acquire a life annuity for the surviving spouse, child or grandchild, the transfer is tax free, if certain conditions are met.
In the case of a registered retirement income fund (RRIF) or life income fund (LIF), the rules regarding tax-free vesting have the same characteristics of inclusion and deduction for the computation of taxable income as those of an RRSP.
In short, vigilance is a must when writing a will. When there are conditions attached to a bequest of property, it is important to verify whether such condition(s) will have a tax impact. Our will and estate planning specialists can help ensure peace of mind and financial security for both your loved ones and yourself.