There is renewed discussion on whether Canada will become another jurisdiction where specific gift or estate taxes will be imposed on inheritances. There is speculation that the discussion will lead to something concrete as early as next week’s Federal Budget.
In the meantime, there are situations where inheritances can come with a tax burden, such as the one described in a recent Tax Court of Canada case (Goldman v. the Queen 2021 TCC 13). In this case, The Appellant’s mother, Ms. G learned that she had only months left to live. Ms. G took steps to arrange her financial affairs. She executed a codicil to her will appointing the Appellant as the executor of her estate. She also designated the Appellant as the beneficiary of her RRSP.
Ms. G had three daughters, the Appellant and her two sisters. Ms. G’s only significant asset was her RRSP. She told the Appellant that she was making the Appellant the designated beneficiary of the RRSP on the explicit understanding that the Appellant would use the proceeds of the RRSP to pay her funeral expenses, pay the costs of administering her estate, pay her final bills, reimburse the travel costs of her other daughters and their families for travelling to Toronto to visit her and attend her funeral, and divide any remaining funds among the Appellant and her sisters. Following her mother’s death, the Appellant received $76,616 in net proceeds from the RRSP (
“RRSP Proceeds”). She distributed the RRSP Proceeds in accordance with her mother’s wishes.
The Canada Revenue Agency (“CRA”) assessed the Appellant in respect of the transfer of the RRSP Proceeds to the Appellant, invoking a section of the Income Tax Act (“ITA”), that essentially says where a person receives assets from a non-arm’s length person who owes taxes, the recipient becomes jointly and severally liable for the transferor’s tax debts up to the to the excess of the fair market value (FMV) of the property received over the consideration provided for the property. Ms. G had a considerable tax debt and on her death, in excess of the RRRP Proceeds.
Having established that a trust was created, The Court asserted that a tax debt owed by a trust is a debt of the trust itself. It is not a personal debt of the trustee. While the ITA imposes on the trustee the obligation to use the trust’s assets to pay that debt, it does not impose the debt itself on the trustee personally. If there are insufficient assets in a trust to pay its debts, the CRA cannot simply seize the trustee’s personal assets. The Court noted that under certain sections of the ITA a trustee can be held personally liable if he or she has distributed assets of a trust without first obtaining a clearance certificate. However, in the absence of an assessment under these sections of the ITA, a trustee has no personal exposure in respect of a trust’s tax debts simply by virtue of being a trustee.
However, after payment of certain costs including executor fees and legal fees, the residue of the Trust was distributed among the three sisters as beneficiaries. The Court ruled that the distribution received by the Appellant personally was subject to CRA assessment as noted above. The Court also determined that the legal fees paid out of the RRSP Proceeds should be added to the assessment because the fees incurred were associated with the appeal and not related to the trust. On the other hand, The Court determined that the executor fees were not part of the assessment because they were a cost of the Trust despite the fact it appears the Appellant did not declare the fees received as income (see previous blogs on this issue).
As an aside, and of interest (to me, anyway) the Appellant objected to the assessment because she contended the section of the ITA under which the assessment was made violated (or deprived) her right to life, liberty and security of the person under the Canadian Charter of Rights and Freedoms. The Court noted that The Federal Court of Appeal has consistently held that an assessment under the ITA cannot result in a deprivation of life, liberty or security. There is more on this issue in the reasons for judgment, in case you are interested!
Happy Reading and stay safe!