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RRSP and RRIF errors: Advisors don’t always know best

by Wayne Cheveldayoff, 2003-08-17

Recent court and regulatory decisions have highlighted some costly advisor errors regarding RRSPs and RRIFs.

In one case, the advisor failed to ensure that a beneficiary was designated when an RRSP was converted to a RRIF, leaving an eldest son without the inheritance intended for him.

In another case, the advisor’s scheme to help individuals transfer funds out of a lock-in RRSP backfired, with the advisor out of a job, his employer fined by regulators and tax officials eyeing his clients for unpaid income taxes.

With so much constant emphasis on saving taxes, the designation of a beneficiary is usually the last thing on the minds of people setting up a registered account. But the courts have demonstrated that it is more than an administrative detail.

In a recent court case (Bramley vs. Bramley Estate), the British Columbia Supreme Court ruled that a beneficiary designation for an RRSP does not carry over upon conversion to a RRIF. (Individuals with an RRSP must convert it to a RRIF when they reach age 69.)

This underlined that the RRSP and RRIF documents are completely separate and the designation of a beneficiary must be made each time.

In the Bramley case, the eldest son had been designated as beneficiary in 1983 when the father established the RRSP, but the designation section was left blank in the RRIF document in 2001. Upon the father’s death, the funds in the RRIF went to the estate, which was split among three other children. The eldest son received nothing.

The beneficiary designation was also the central focus of a B.C. Court of Appeal decision last November. In Desharnais vs. Toronto Dominion Bank, the bank’s retail brokerage arm (TD Evergreen) and one of its advisors were judged negligent for breaching a duty to give proper advice concerning the designation of a beneficiary.

The court rejected TD’s claim that proper advice had been given and instead found that the advisor had failed to ensure that the beneficiary designation was properly filled out in new RRSP documents when the funds were transferred from a TD Bank RRSP to a TD Evergreen RRSP.

The judgment cost the TD Bank $140,000 plus legal costs.

The case involving locked-in RRSPs was revealed in an Ontario Securities Commission settlement in August 2003 with Dundee Securities, which paid $150,000 in investigation costs and agreed to beef up its compliance procedures. The case concerned an advisor who worked at Fortune Financial when Dundee acquired it in 1999 and continued to work at Dundee until May 2000. He then worked at Buckingham Securities until June 2001. (Full details of the enforcement settlement with Dundee can be obtained at the OSC’s website,

Normally, funds in a locked-in RRSP must remain there until retirement. However, the advisor took advantage of a provision that permits locked-in RRSPs, like other RRSPs, to invest in the shares of Canadian Controlled Private Corporations (CCPCs).

“The clients purchased shares of CCPCs using monies located in their locked-in RRSPs,” noted the OSC. “The clients concurrently obtained a loan from the scheme’s promoters representing a portion of the purchase price of the CCPC shares, varying from approximately 60 per cent to 80 per cent. The remaining portion, varying from approximately 20 per cent to 40 per cent, was charged as an ‘administrative fee’ by the promoters of the scheme.”

The OSC said many of the individuals going through with these withdrawals despite the exorbitant cost were low-income earners who needed access to the funds. The advisor processed over 670 such transactions worth more than $17 million during his time at three investment firms.

While Dundee has put the matter behind it, the same unfortunately cannot be said for the advisor’s clients, who may now have to face up to the conclusion that his scheme to unlock their funds was, indeed, too good to be true.

The tax authorities have taken an interest in the matter and may be in the process of demanding unpaid income taxes from those who withdrew funds from their locked-in RRSPs in this way.

“These transactions,” the OSC said, “may be subject to taxation since the CCPC shares were used as collateral for the loans. The Canada Customs and Revenue Agency is in the process of identifying and notifying the clients whose ‘investment’ has now become subject to taxation.”

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at

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©2003 Wayne Cheveldayoff