Named beneficiary ordered to reimburse estate for tax on father’s RRIF

By Doug Carroll | January 26 2016 07:00AM
At issue

Ever since the Supreme Court of Canada (SCC) decision in Pecore, there seem to be more reported cases where siblings are battling over a deceased parent’s joint account. In truth, it’s surely no more common now than before, but the arguments – both personal and legal – may be cast differently in the wake of that case.

Even before that ruling, financial advisors may have been cautious about carrying out such transfers. As case law continues to build, the scope of concern threatens to press beyond joint ownership and reach out toward beneficiary designations.

2007 SCC 17 Pecore v. Pecore, 2007 SCC 18 Madsen Estate v. Saylor

The SCC held that the presumption of a resulting trust applies when a parent gratuitously (ie., no consideration given) adds an adult child as joint owner of property. Following the parent’s death, that child would have to prove it was the parent’s intention to pass a beneficial interest, else the child is deemed to hold the property in trust for the estate. On the respective facts, the daughter in Pecore succeeded and daughter in Madsen did not.

The case has been cited in hundreds of subsequent lower court cases dealing with joint accounts. One hopes it has also headed off destructive litigation in similar fact situations once the parties had given it sober second thought.

McConomy-Wood v. McConomy, 2009 CanLII 7174 (ON SC)

This case discussed the potential that the presumption of resulting trust could apply to a RRIF beneficiary designation. After summarizing Pecore and other potentially relevant cases, the judge stated that it was not necessary to resort to this presumption in order to decide the case.

Rather, there was ample evidence from all parties (including the daughter who was the RRIF beneficiary) that the mother had intended that the three children would “all be treated equally.”

Morrison Estate (Re), 2015 ABQB 769

In this case, the deceased had four children and eleven grandchildren. One son, Douglas (who also happened to be the executor) was named as RRIF beneficiary. Pursuant to the provisions of the Income Tax Act, the estate was responsible for the tax on the deregistered RRIF, while Douglas received the gross $72,683 RRIF proceeds.

As in McConomy, the court grappled at length with whether the presumption of resulting trust could be applied to a RRIF beneficiary designation. This included considering whether there was a relevant distinction between the inter vivos nature of a joint ownership transfer, and the apparent testamentary nature of beneficiary designations. In the end, the judge determined that the case could be decided without addressing these issues.

On the evidence, the judge made “a very thin finding” that on a balance of probabilities, the father intended Douglas to be the sole RRIF beneficiary. However, he went on to infer that the father was either unaware or mistaken how the tax liability would be borne. Douglas could not be compelled to share the RRIF (as it was his outright), but the judge invoked a provision of the Alberta Judicature Act to find that Douglas was unjustly enriched, and therefore that he must “reimburse the Estate for the tax it paid on his behalf.” [my emphasis] By the judge’s own admission, his approach was “extraordinary.”

The costs of the son who brought the application were ordered to be paid out of the estate. Douglas was left to bear his own costs.

In his closing, the judge voices his concerns over the implications if Pecore is eventually determined to apply to beneficiary designations. He warns of a “floodgate of litigation against the designated beneficiaries by disappointed siblings.” One is left to wonder how much this perspective may have fed into the circuitous route used to reach the resolution, particularly as the financial results appear to be similar to what would have happened by recognizing a resulting trust.

Practice points
  1. If possible, a parent should make clear the reason and nature of a joint ownership transfer or beneficiary designation. Ideally this will be recorded contemporaneous with the event, assisted and informed by independent legal counsel.
  2. Realistically, such actions are usually undertaken with an eye on informality, privacy and low-cost. And that likely means that we’ll continue to see cases like these before the courts when disappointed siblings learn the details.
  3. Financial advisors should always take care in assisting transfers and completing beneficiary designations. They may also want to keep their own notes, should the ‘right’ facts align and the advisor be called as a witness.