The Succession Law Reform Act ("SLRA") is the primary legislation in Ontario that governs the distribution of a person's property on their death. Part III of the SLRA outlines the rules regarding the designation of beneficiaries for proceeds of "plans", which include Registered Retirement Savings Plans ("RRSPs"), Registered Retirement Income Funds ("RRIFs"), Tax-Free Savings Accounts ("TFSAs") and similar types of tax-effective and retirement-oriented accounts.
This bulletin outlines proposed amendments to the SLRA to clarify the powers of substitute decision-makers (particularly attorneys for property appointed under a continuing power of attorney for property and guardians of property) regarding such plans.
Beneficiary Designations Generally
The SLRA allows the "participant" of a plan to make a designation as to whom will receive the proceeds of a plan upon that participant's death. A participant can make a designation by way of an "instrument" or by will. An "instrument" includes beneficiary designation forms commonly offered by financial institutions that facilitate plans.
Beneficiary designations are somewhat unique; if a participant designates a beneficiary of the proceeds of a plan, then those proceeds will flow outside of the estate of the participant. If a beneficiary receives a plan's proceeds pursuant to such designation, then such proceeds will not be subject to probate fees under Ontario's Estate Administration Tax Act—this is even the case if the participant makes the designation in their will. Note, however, that probate fees will still be applicable to plan proceeds in certain situations (e.g. if there is no beneficiary designated, if the beneficiary predeceases the participant and the designation does not provide for a valid alternative beneficiary, or if the estate itself is designated as beneficiary).
Substitute Decision-Makers and Beneficiary Designations
The law relating to the powers of attorneys under a continuing power of attorney for property/court-appointed guardians for property to execute beneficiary designations is not completely clear. Subsection 7(2) of Ontario's Substitute Decisions Act, 1992 states that a continuing power of attorney may authorize the person named as attorney to do on the grantor's behalf anything in respect of property that the grantor could do if capable, except make a will (and subsection 31(1) contains a similar provision for guardians of property). Whether this encompasses beneficiary designations is ambiguous, because they can be made both in a will and in a separate "instrument". An "instrument" does not have the same execution formalities as a will; for example, the former only requires one witness to be valid, whereas the latter requires two.
To add further ambiguity, subsection 1(1) of the SLRA defines "will" as including "any other testamentary disposition". Accordingly, there has been much debate about whether beneficiary designations are testamentary dispositions. Judges have strayed away from directly ruling whether beneficiary designations are testamentary dispositions, and, similarly, whether a substitute decision-maker can make or modify beneficiary designations.
There are situations where having clarity in this area would definitely be in the best interests of incapable individuals. For example, at age 71 an individual's RRSP will automatically convert into a RRIF. Since an RRIF is technically a new plan, it accordingly requires a new beneficiary designation. If an individual opens an RRSP while capable, subsequently suffers from mental incapacity, and during their incapacity their RRSP converts into a RRIF, then the individual, while incapable, may not be able to ensure that the RRIF reflects the beneficiary designation that they had originally made for the RRSP. It may end up being that the estate becomes the beneficiary of the RRIF, which also means the RRIF will be subject to probate fees. If the individual's attorney for property were to have the power to make a beneficiary designation for the RRIF identical to that of the RRSP, then this would preserve the individual's testamentary intent while also ensuring probate fee savings. The issue is that there is no explicit legislative authorization of the attorney's ability to do so.
A similar issue exists when the substitute decision-maker is transferring the incapable individual's plan from one financial institution to another. While it is possible that the transferee financial institution may honour the existing beneficiary designation, this still represents an area of risk. Financial institutions tend to treat attorneys appointed under a continuing power of attorney for property with heightened sensitivity, as there have been documented cases of attorneys abusing their powers to the detriment of the grantor. The risks associated with attorneys are magnified with respect to beneficiary designations for plans, especially given the lack of clear law in this area.
Proposed Amendments to the SLRA
To address such issues, Ontario's Regulatory Registry recently posted the Public consultation on proposed amendments to the Succession Law Reform Act (SLRA) to offer greater clarity to substitute decision makers and financial institutions regarding beneficiary designations for a plan. The posting details proposed amendments to Part III of the SLRA that would offer greater clarity to financial institutions when dealing with substitute decision-makers conducting changes to plans on a participant's behalf. It puts forward explicit language to be written into the SLRA allowing substitute decision-makers to alter an instrument making a beneficiary designation while ensuring that the beneficiaries remain the same as the participant had intended. The draft language being considered is as follows:
"If a participant has designated a person by an instrument to receive a benefit payable under a plan on the participant's death and if the plan is being converted, renewed, replaced or transferred, the participant's attorney under a continuing power of attorney for property or the participant's guardian of property may make a designation, by instrument signed by the attorney or guardian, in order to permit the person to receive the same benefit payable under the plan that results from the conversion, renewal, replacement or transfer."
As noted above, although some financial institutions may honor existing beneficiary designations for plan conversions, renewals, replacements or transfers, others may be averse to the risk. This legislation will greatly reduce such risk.
The amendments authorize substitute decision-makers to make beneficiary designations to address legitimate scenarios where it is necessary to make a "new" beneficiary designation, but stipulates that the beneficiary so designated must be the same. This is an effective way of expanding the powers of substitute decision-makers to allow them to fulfill their duties while also establishing safeguards to preserve the testamentary intent of the incapable participant. In fact, some provinces have already enacted similar legislation to address these issues (i.e. see subsection 20(5) of British Columbia's Power of Attorney Act, which includes some similar language).
Many practitioners agree that this would be a welcome amendment to the SLRA, although it should be noted that the passage quoted above may not be the final text of the amendment. The Government of Ontario welcomed comments on its proposal until July 8th; it will be interesting to see if these comments inspire further amendments.
These amendments further show how important it is to ensure that any beneficiary designation should be harmonious with the overall estate planning and incapacity planning.
The authors gratefully acknowledge the contribution of Khaleel Bateman, Summer Student.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.