Despite the tax rule which makes a person who distributes property under their control without obtaining the proper tax clearance personally liable for unpaid taxes, the Canada Revenue Agency (CRA) took the position in a recent technical interpretation that the tax should first be recovered from the named beneficiaries of the deceased’s registered plans.

The executor was instructed to pay all debts and testamentary expenses before distributing the remaining assets to the survivng spouse, adult kids and grandkids. The family home and car went to the surviving spouse while the adult kids received RRIF proceeds as beneficiaries. The estate filed the terminal return showing a tax balance payable a portion of which was paid with a remaining balance owing.

To their surprise the RRIF beneficiaries were assessed for the estate’s liability. The CRA noted that notwithstanding the potential liability of the executor on account of the distribution, it is unlikely that much tax recovery would be gained through this avenue. In this case where the bulk of the tax owing by the estate arose as a result of the RRIF income inclusion and given that RRIF beneficiaries are jointly and severally liable to pay a part of the annuitant’s tax that tax should first be recovered from them.

This technical interpretation is a reminder to those in receipt of estate distributions all or a part of which comes from a registered plan that they should take steps to determine if the estate’s tax libilities have been settled or they may have to part with some of their inheritance.