Death, taxes and RRSPs
Death and taxes - a common duo, certainly when it comes to your RRSP or RRIF account.
The general rule is that absent a tax-deferred rollover (generally to a surviving spouse or partner), the fair market value of your RRSP or RRIF upon the date of death must be included in your income for the year of death, and is reported by your executor on your terminal tax return.
But what if the executor fails to include the value of an RRSP when filing that terminal return? How long does the Canada Revenue Agency have to go back and reassess the estate for taxes owing on the deceased's RRSP?
That was the question in a recent tax case before the Federal Court of Appeal, concerning the estate of Herman Gebhart.
Mr. Gebhart died on his Saskatchewan ranch in May, 1996. His nephew was the executor of his estate and hired a lawyer to handle the legal issues connected with the estate.
In the probate application, the lawyer listed all of Mr. Gebhart's assets, including the fact that he held the $41,000 RRSP with Mackenzie Financial. At some point in 2006, the account was closed and the funds were transferred to the estate's bank account.
The lawyer prepared the terminal tax return on behalf of the executor and while he included the fair market value of other RRSPs on the return, he did not include the fair market value of the Mackenzie RRSP, since it appeared that no T4-RSP slip was received for that amount.
The CRA originally assessed Mr. Gebhart's terminal tax return on Jan. 27, 1997. Just over five years later, the CRA proceeded to reassess the estate when it learned that the $41,000 Mackenzie RRSP was omitted from the terminal return.
The estate objected to the CRA's reassessment, arguing that it was beyond the "normal reassessment period," which for individuals is three years from the date of mailing of the original assessment.
The CRA invoked the "misrepresentation rule," which permits it to reassess a taxpayer beyond the normal reassessment period in the case of a "misrepresentation that was attributable to neglect, carelessness or wilful default."
While the estate's lawyer agreed that the failure to report the $41,000 of RRSP proceeds was indeed a misrepresentation, he argued that it was not attributable to any neglect or carelessness on the part of the executor.
The Federal Court disagreed, concluding that there was neglect on the part of executor since it was his responsibility to ensure that the terminal return was correctly filed, notwithstanding that a T4-RSP slip may not have been received.
As the court wrote, "[The executor] knew, or ought to have known, that the proceeds from the closure of all RSPs owned by Mr. Gebhart at the time of his death were required to be included in the income of the estate for 1996."
Thus, the court warranted the reassessment beyond the normal reassessment period.