As part of the estate planning process an assessment ought to made of how the income taxes and other liabilities of the client will be met on his or her passing. Often clients will ask whether any of their family members can become liable for their income taxes and other liabilities on their death. The answer is “yes” a beneficiary of an estate who has received property in priority to the satisfaction of the deceased’s liabilities can be called upon to return property received from the estate. This position is subject to the beneficiary having any equitable defenses available to a claim by a creditor or to any statutory protections available.
The most common statutory protection available to a beneficiary is where the benefits they receive are in the form of life insurance proceeds that have been designated as payable to them. If a beneficiary has been designated, then the receipt of the proceeds under the policy will not be available to the creditors of the estate of the life insured, if the designated beneficiary falls within the protected group of family members, such as the spouse or children of the deceased owner/insured, then the policy rights are also protected during the life insured’s owners lifetime.
This protection has also been, to a certain extent, extended to the designated beneficiary of a taxpayer’s RRSP with one important exception. The exception is for tax liabilities that may be owing by the deceased taxpayer or his or her estate. This is because section 160.2 of the Income Tax Act gives the minister the power to issue an assessment against the beneficiary of an RRSP for the tax liability owing by the deceased owner’s estate.
An understanding appears to exist that the minister would only seek to collect from the beneficiary, by relying upon section 160.2, in the event of a deficiency in the assets of the deceased owners estate to meet the tax liability due on the owners death. Or, to put this another way the commonly held perception is that, the minister was only be entitled to seek to collect from the beneficiary by relying on section 160.2 after having attempted to collect from the estate or its representatives.
The recent decision in O’Callahan v. The Queen, 2016 DTC 1141 reminds us that this is not the case.
The facts quite simply involved a surviving sister who was the direct beneficiary of two RRSPs owned by her deceased brother. With his death, she collected the RRSPs directly from the trustees of the plans by having the RRSPs collapsed and the funds paid to her. Under the relevant sections of the Income Tax Act, the amounts in the plans were included in the income of the brother for his terminal year and tax was payable by his estate. The brother’s estate paid part but the balance remained unpaid. The minister, without seeking full payment from the estate, issued an assessment under section 160.2 of the Income Tax Act against the sister for the balance owing. The sister appealed the assessment but lost.
The case reminds us that section 160.2 imposes joint and several liability on the deceased and the recipient of the funds of the RRSP to pay the deceased’s taxes for the year of death. The Court determined that once the beneficiary received the funds of the RRSP directly from the trustee of the plans without any deduction at source, she became jointly and severally liable for the taxes owing by the deceased. As a result, there was no primary obligation on the minister to attempt to collect from the estate of the deceased taxpayer.
The sister argued that the section required the minister to first try to collect the tax liability from the estate. The Court rejected this argument. Instead, the Court determined the minister was able to rely upon the “several” aspect of the section to seek payment directly from the beneficiary.
The upshot of this is that we can expect the minister to attempt to take the path of least resistance when seeking payment of taxes owing. Beneficiaries of registered plans ought to be advised to be cautious when dealing with the funds received from registered plans, particularly where they may not also be the residuary beneficiaries of the estate.