When a person dies their RRSP and RIFs (R.P.s) are taxed as income to the deceased in the year of their death.
Because of this the tax is subtracted and can often be 40 – 50% of the amount held in the R.P. The deceased’s estate pays the tax and the person who is named as the beneficiary of the R.P. receives the entire pre-tax amount of the R.P.
In a recent decision in Alberta Morrison v. Morrison (2015) ABQB 769 the court found a way to remedy this unfairness by imposing a Constructive Trust and stated that the beneficiary of the R.P. was required to reimburse the estate for the amount of the tax because the beneficiary was “unjustly enriched”.
Constructive Trusts will only be imposed however if a person can be shown to be unjustly enriched by the gift they have received. This will require evidence of the intention of the testator and the circumstances of the beneficiary. Was the testator aware when they made their will that the R.P. would be taxed in the estate and the beneficiary would receive the entire R.P.?
As a result of this court decision it would be prudent for testators to state in their wills who they intend to pay the tax on their R.P. For example their will could confirm that they have named a person the beneficiary of their R.P. and that their intention is that that person would or would not be required to reimburse their estate for any tax which is payable on the testator’s death from the R.P.
Deborah A. Todd