Creditors Are Out Of Luck

By Paul Jasiura

On February 3, 2005, the Supreme Court of Canada refused to grant leave in a case called Amherst Crane Rentals Limited v. Perring, involving competing claims to RRSP benefits. As a result, the Ontario Court of Appeal decision in the case now stands as binding.

At the Court of Appeal, all three judges had agreed that the designated beneficiary of an RRSP was entitled to receive the benefits on the death of the owner, without those benefits being available to pay any creditors of the deceased owner.

There had been conflicting caselaw in different provinces on this point.

One stream of cases had provided that the benefits essentially flowed through the estate of the deceased, and then out to the designated beneficiary. For the brief moment when the benefits passed through the estate, they became subject to the payment of the debts of the deceased owing at the time of his death.

The second stream of cases had come to a different conclusion. They had taken the view that as a matter of contract, confirmed by statute law, the benefits never passed through the estate. The benefits were payable directly from the Plan to the beneficiary.

EFFECT OF THE AMHERST CASE ON PROBATE TAX

Probate tax is payable in Ontario calculated on the value of the deceased’s estate. For several years, there was confusion among estate lawyers as to whether the amounts in the deceased’s RRSP had to be included as part of the value of the estate, when preparing probate applications. If RRSPs were to be included, then the amount of probate tax could be significantly higher. With the Amherst decision from the Supreme Court of Canada, there is no longer any need for confusion. Because the RRSP proceeds clearly do not pass through the estate, there is no question that the probate tax is not calculated with the value of the RRSP taken into account.

GENERAL COMMENTARY

This case is good news to the family members of those individuals who have RRSP monies on deposit at the time of their death, but who also are significantly in debt at that time. It is bad news for those with legitimate claims against a person who dies before monies can be recovered from him.

In the Amherst case, the deceased owed a debt of over $53,000 arising from his breach of a statutory trust. He had $117,000 in his RRSPs, which the creditor had not managed to access before the debtor’s death, to pay off that debt. The widow was the sole beneficiary of the RRSPs and she was entitled to all of the proceeds, leaving the deceased’s estate bankrupt. In the end result, the deceased was able to circumvent his debt, arising out of a statutory liability. Instead he was able to “increase” the value of his own estate by the $53,000, by not accessing his RRSP proceeds in his lifetime, to pay off his debt. The deceased thereby enriched his widow by the same $53,000 amount. The creditor has likely felt cheated out of his lawful entitlement, but nevertheless the widow won in this case.

DEPENDANTS’ RELIEF

Although the Amherst case is clear that the proceeds of an RRSP do not pass through the estate, there is still one exception where this might not hold true completely.

Under the Succession Law Reform Act, if a deceased did not adequately provide for the support of a dependant, the dependant can make a claim for such support against the estate of the deceased.

The Act provides that the value of the benefits under an RRSP shall be deemed to be included in the estate for the purposes of determining the proper amount of support.

This does not necessarily mean that the RRSP proceeds are thereby available for payment to the dependant in need of support from the estate. It just means that, when deciding what the proper level of support should be for that dependant, the court would include the value of the RRSP benefits as if they were part of the estate, and make an award against the estate accordingly.

This could be a hollow exercise though if the estate does not have the assets to pay the proper level of support. In other words this section does not make the RRSP part of the estate, it just puts the other assets of the estate more at risk of being available to pay the proper support order.

For example if a deceased had $50,000 in his estate, but $500,000 in RRSP benefits going out to his favourite charity, then a proper support order of say a lump sum of $200,000 to his widow would not be fully enforceable, since there is only $50,000 available to her. (This example is for illustration purposes only, and ignores the additional issue of who pays the income tax payable on the $500,000 RRSP benefits).