Introduction

The recent Alberta Court of Queen’s Bench case, Morrison Estate (Re), 2015 ABQB 769, considered whether the presumption of resulting trust should be applied to beneficiary designations in respect of registered plans and life insurance policies. The Supreme Court of Canada (“SCC”) decision in Pecore v. Pecore, 2007 SCC 17, [Pecore] held that the presumption of advancement no longer applied to inter vivos property transfers from parents to their adult children and that the presumption of resulting trust would apply to such transfers when made without consideration. This puts the onus on an adult child who has received an inter vivos gift from a parent to prove, on a balance of probabilities, that the transferor parent intended the transfer to be a gift.

Pecore did not address whether the presumption of resulting trust should apply to a beneficiary designation made by a parent in favor of an adult child.

Background

The Morrison case arose following the death of John Robert Morrison (“Mr. Morrison”) whose wife had predeceased him. Mr. Morrison’s will appointed two of his children, Douglas and Heather, as executors and directed that his estate be divided equally among his four children: Douglas, Robert, Cameron and Heather. The only exception was a legacy of $11,000 which was to be deducted from Robert’s share in respect of a pre-existing debt and divided among Mr. Morrison’s surviving grandchildren.

Mr. Morrison’s estate consisted of approximately $77,000 in funds held in bank accounts and from insurance proceeds payable to the estate. He also owned a RRIF worth $72,683.25 and had designated his son Douglas as the beneficiary. In accordance with the relevant provisions of the Income Tax Act, RSC 1985, c 1 (5th Supp.), on Mr. Morrison’s death the full value of the RRIF was taxed as income in his terminal return. The majority of the tax liability payable in respect of the terminal return was related to the RRIF, and after payment of this tax liability, there were insufficient funds remaining in the estate to satisfy the $11,000 legacy to be shared by the grandchildren.

One of the sons, Cameron, brought an application for advice and direction to the Alberta Court of Queen’s Bench seeking a declaration that Douglas held the funds he received from the RRIF in trust for the estate.

The Court’s Analysis

Cameron’s argument was based on the applicability of the presumption of resulting trust to beneficiary designations, citing Pecore as authority for this principle. Justice Graesser noted at the outset of his analysis that “The results of this application could have significant impact on the investment and brokerage industry. There are undoubtedly millions of RRSPs, RRIFs and life insurance policies that have designated beneficiaries instead of the proceeds going to the owner’s estate.” He was aware of the implications of accepting Cameron’s argument and reviewed the case law that predated Pecore carefully.

He rejected Cameron’s argument, stating that “…he could think of no sound policy reason why beneficiary designations under RRSPs, RRIFs and insurance policies should not be treated in a similar fashion to beneficiary designations under a will. None of these “gifts” take effect until the death of the owner of the plan or policy.” He noted that there was no uniformity across provincial legislation as to whether beneficiary designations should be considered as inter vivos transactions rather than a testamentary disposition. He further noted that in Ontario, as a result of Ontario’s Succession Law Reform Act, RSO 1990, c S.26, and the Ontario Court of Appeal case Amherst Crane Rentals v. Perring, 2004 CanLII 18104 (ONCA), an RRSP beneficiary designation appears to be a “testamentary disposition”.

Justice Graesser saw a significant distinction between transactions such as placing bank accounts or investment accounts in joint ownership by a parent with an adult child and beneficiary designations by a parent in favor of an adult child. For this reason he stated at paragraph 53 that the presumption of resulting trust, as articulated in Pecore, should not be applied to beneficiary designations for RRIFs, RRSPs and life insurance policies. However, at paragraph 66 he expressly indicated that he was loathe to depart from what he considered to be settled law in this respect in England, citing In Re A Policy No. 6402 of the Scottish Equitable Life Assurance Society, [1902] 1 Ch. D. 282, and the Manitoba Court of Appeal in Dreger v. Dreger, [1994] 10 WWR 293, and Northern Trust Company v. Caldwell et.al. (1914), 25 Man. R. 120 (MBCA). Relying on these cases, he hesitated to hold that the presumption of resulting trust did not apply to beneficiary designations by a parent in favor of an adult child. Instead, he sidestepped that issue altogether and decided that he did not need to apply any presumption, because the evidence proved on a balance of probabilities that Mr. Morrison intended to give Douglas the RRIF. In other words, there was no need to resort to any presumptions before weighing the evidence to come to a decision.

Income tax consequences

The Court was still concerned with the “manifestly unfair” result that Mr. Morrison’s estate bear the taxes arising on the deemed disposition of the RRIF. Justice Graesser noted that Mr. Morrison had treated all of his children equally in distributing the proceeds of the sale of his home, and that he had intended to give $11,000 to his grandchildren, which was impossible after the taxes owing in respect of the RRIF were paid by his estate. For these reasons, he was of the view that Mr. Morrison was not aware that the taxes were required to be paid by the estate and would not have intended this outcome. He remedied the situation through the application of section 8 of Alberta’s Judicature Act, RSA 2000 c J-2, which permits a court to order an equitable remedy to resolve any claim brought forward in proceeding.

He determined that Douglas had been unjustly enriched by the estate’s payment of the taxes in connection with the RRIF and that therefore Douglas held a portion of the RRIF proceeds on a constructive trust for the estate, to the extent required to reimburse the estate for the tax liability associated with the RRIF.

Importance of estate planning advice in connection with beneficiary designations

This case illustrates how important it is for clients to discuss beneficiary designations with their estate planning advisors. Justice Graesser correctly assumes that many registered plan owners are unaware of the tax consequences of beneficiary designations. They are often made when the registered plan is first acquired from a financial institution. The RRSP or RRIF plan holder simply completes a form without understanding the implications of the beneficiary designation and often without any understanding of the tax consequences. Any good estate plan must consider the tax consequences of each element of the plan and how it impacts the individual’s estate and beneficiaries. Justice Graesser suggests at the end of his judgment in his “Observations” that the problem created in Morrison could be avoided if beneficiary designation forms included an express statement as to the designator’s intentions. He suggests that the form include a box that could be ticked off by the plan holder indicating that the beneficiary designation is intended as a gift. Unfortunately, clients require advice to understand the implications of beneficiary designations and checking off a box to indicate that a designation is a “gift” would not help them understand the tax consequences or how a particular beneficiary designation fits into their overall estate plan. It is unlikely that any statement included in the beneficiary designation form is an adequate substitute for proper estate planning advice.

While Morrison may have arrived at an equitable result for the beneficiaries of the estate, it does not resolve the question of whether the presumption of resulting trust, as articulated in Pecore, should apply to beneficiary designations. There will no doubt be further litigation before that question is settled.