Effective beneficiary designations when converting RRSPs to RRIFs

Editor’s note: This article was updated on July 15, 2021, in collaboration with Adam Dickinson, to include the decision from Mak (Estate) v Mak.

Naming beneficiaries for RRSPs or RRIFs isn’t as simple as your client may think, and planning may be necessary to ensure the client’s desired outcome.

By Dec. 31 of the year they turn 71, RRSP annuitants are mandated by the Income Tax Act to terminate their RRSPs and convert them to RRIFs. What many don’t realize, however, is that the conversion from RRSP to RRIF represents a new contract, requiring the annuitant to (re)designate a beneficiary, either in the RRIF plan document or in the annuitant’s will (as provided for in legislation).

If there are no beneficiary (re)designations, the deceased annuitant’s estate may ultimately be deemed the default beneficiary of the RRIF, with potentially devastating effects. In the midst of grieving, families may face tax consequences, including the RRIF becoming subject to probate in most provinces. The lack of beneficiary designation on the RRIF may also lead to legal challenges and subsequent family disharmony.

A 2020 Ontario case, Boulos vs. Duca Financial Services Credit Union, highlights this point.

A client set up three RRSP accounts with Duca Financial Services and named his friend Boulos as the sole beneficiary of all three. When the client turned 71, Duca Financial Services terminated the RRSPs and converted them to RRIFs, but the client didn’t complete or sign beneficiary designation forms for the RRIFs. When the client died in 2015, searches revealed no will, so it was determined that he died intestate. Boulos died in 2017, and his widow was the sole beneficiary as well as executor of his estate.

The main issue was a determination as to the beneficiary of the client’s three RRIFs — Boulos’s estate or the client’s cousin. The court ultimately held that since it was the client’s wish to gift the three RRSPs to Boulos, the client “effected a gift of his RRSP accounts and the derivative RRIF accounts to Mr. Boulos.”

In the absence of a RRIF designation, it took five years and thousands of dollars to determine the beneficiary of the RRIFs.

RRSP/RRIF designations and incapacity

What if upon turning 71 the client’s RRSPs were converted to RRIFs, but at the same time it was determined that he had lost mental capacity, disallowing him from making a RRIF beneficiary designation?

Attorneys acting under a power of attorney (for property) are generally precluded from making what may be deemed to be testamentary dispositions. For example, they couldn’t designate a beneficiary on a RRIF when the conversion occurs, even if the beneficiary is the same one that was designated under the RRSP.

Yet, incapacity precludes the annuitant from (re)designating a RRIF beneficiary because they don’t have the capacity to make a testamentary disposition. In such a case, the annuitant’s estate becomes the default beneficiary, which may be contrary to the annuitant’s intent.

In many instances, the courts have stepped in to adjudicate whether an attorney is authorized to make beneficiary designations when RRSPs are converted to RRIFs.

British Columbia has revised legislation to empower attorneys to “create a new beneficiary designation, if the designation is made in an instrument that is renewing, replacing or converting a similar instrument made by the adult, while capable, and the newly designated beneficiary is the same beneficiary that was designated in the similar instrument.” Nova Scotia and New Brunswick have similar legislation, while Alberta has recently introduced legislation that will authorize attorneys to do the same.

In Quebec, designations for RRSPs/RRIFs must be provided for in the annuitant’s will, in the absence of which RRSP/RRIF proceeds fall to the estate.

Advisors should become familiar with legislation and court cases with respect to the rights and authority of an attorney in making beneficiary designations, especially when it comes to RRSP/RRIF conversions.

Other developments in beneficiary designations

In a March 2020 Ontario case, Calmusky v Calmusky, a father of two named one child as the sole designated beneficiary of his RRIF. Upon the father’s death, the other child sued, claiming, among other things, that the RRIF be deemed an asset of their father’s estate to be distributed evenly between him and his sibling.

The court made a point that naming only one child as the sole beneficiary made the beneficiary designation tantamount to a gratuitous transfer — a transfer of property for no payment. In such a situation, the rebuttable presumption of resulting trust applies, and, as a trust, the RRIF would form part of the deceased father’s estate. The court ruled in favour of the claimant, because the named beneficiary couldn’t provide sufficient evidence to rebut the presumption of resulting trust.

It appears from Calmusky that every RRSP/RRIF designation may be deemed a gratuitous transfer to which the rebuttable presumption of resulting trust would apply. The basis for the presumption of resulting trust on an RRIF/RRSP account hinges on determining the deceased annuitant’s intent.

This puts pressure on RRSP/RRIF annuitants to document their intent on the account opening document or a separate document.

An argument may be made that the structure of the RRSP/RRIF doesn’t lend itself to gratuitous transfers, but courts in a few common-law jurisdictions are increasingly requiring RRSP/RRIF beneficiaries to show additional proof that the annuitant intended to name them as beneficiaries.

A 2021 Ontario case appears to provide a clearer distinction in determining whether a RRIF/RRSP is subject to the general presumption of resulting trust.

In Mak (Estate) v Mak, a mother designated one of her four sons, Kenny, as the sole beneficiary of her RRIF. Upon the mother’s death, the other three children initiated litigation, claiming, among other things, that the beneficiary designation of Kenny be set aside.

The court examined whether there was a presumption of resulting trust in this instance. In its reason for judgment, it determined that since a RRIF designation is tantamount to a testamentary disposition, the presumption of resulting trust cannot apply. This is because a RRIF designation is materially different from an inter vivos gift, as is the case in Pecore v Pecore, which is what Calmusky erroneously relied on.

The Mak ruling further determined that the presumption of a resulting trust shouldn’t apply to beneficiary designations on a RRIF considering that these designations are explicitly allowed in relevant legislation — in this case, the Succession Law Reform Act of Ontario.

Kenny prevailed as the sole designated beneficiary of his mother’s RRIF.

Although the court’s reason for judgment in Mak is clear, it is recommended that advisors encourage their clients to document their intent when designating beneficiaries on their RRSPs/RRIFs.

Tim Brisibe, TEP, is Director, Tax & Estate Planning at Mackenzie Investments.