A recent Alberta Court of Queen’s Bench decision in Morrison v. Morrison 2015 CarswellAlta 2249 (Alta.Q.B.) reminds advisors and clients alike of (i) the need to consider the income tax consequences of not only their overall estate plan, but components within it, and (ii) the importance of stating intention expressly and directly, particularly when one child may be benefitted more so than other children. The facts in Morrison were not unusual nor is the fact that, despite the relatively modest dollar amounts involved, the matter went to trial – an unfortunate result for all concerned.
Mr. Morrison held a RRIF having a value at the date of his death of approximately $73,000. On his death this resulted in an income tax liability to his estate of about $29,000. He designated his son, Douglas, as the beneficiary of the RRIF.
Under the Income Tax Act, on the date of Mr. Morrison’s death the fair market value of the RRIF is included in his income for the taxation year in which he died. Where there is a designated beneficiary (other than the spouse, common law partner or financially dependent child or grandchild), the designated beneficiary takes the gross value of the RRIF. The income tax liability resulting from the inclusion in income in the year of Mr. Morrison’s death, is a liability of his estate. More specifically, it is the beneficiaries of the residue of Mr. Morrison’s estate that bear the burden of the tax liability associated with the RRIF.
Under the terms of Mr. Morrison’s Will, after providing for a legacy of $1,000 for each of his eleven grandchildren, he directed that the residue of his estate was to be divided equally among his four children. The share of the residue that was to go to one child, Robert was to bear the burden of satisfying the legacies for the grandchildren. The problem was that the income tax liability that arose because of the RRIF, together with other liabilities, resulted in the residue being under $22,000. Needless to say, these facts resulted in a trial where the Court had to consider the means to achieve equity among the intended beneficiaries of Mr. Morrison’s estate.
After considering a number of differing grounds upon which a means to redress the inequity could be achieved, the Court settled on relying upon a specific statutory jurisdiction granted to the Court to grant a remedy to “which any of the parties to a proceeding may appear to be entitled in respect of any and every legal or equitable claim properly brought forward”. Justice Graesser considered this to be a case where Douglas was unjustly enriched. This justified issuing an order that Douglas reimburse the estate by the amount of taxes paid by the estate.
Justice Gaesser, in his concluding remarks, implicitly noted that issues of this nature could be avoided if the form allowing for a beneficiary designation could be amended to include an express statement as to the intention. The upshot for advisors and clients alike is this: when implementing an estate plan, including components within it that may benefit one child more than others, such as a beneficiary designation, it is vital that a statement be made about the intention to make a gift and about the intention as to where the tax liability is to be borne.