For those of our readers who are a “spouse”, have you ever considered whether you remain a spouse after the death of your spouse. This was the issue the Tax Court of Canada had to consider in the case of Kuchta v. The Queen, 2015 TCC 289. In particular, the Court considered the meaning of the word “spouse” in the context of the provisions under ss.160(1) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “Act”). For those of you who do not know the import of ss. 160(1), it is the section of the Act that imposes joint and several liability on certain transferees of property from a tax debtor. In particular, the section reads as follows:
“Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person’s spouse or common law partner or a person who has since become the person’s spouse or common law partner,
(b) a person who was under 18 years of age, or
(c) a person with whom the person was not dealing at arm’s length,
the following rules apply,
(d) the transferee and transferor are jointly and severally, or solidarily liable to pay a part of the transferor’s tax under this Part… .”
The facts were not unusual.
The deceased, Mr. Juba, died in 2007. At the time of his death, he was married to Ms. Kuchta. Not unlike many couples, Mr. Juba designated his spouse, Ms. Kuchta as the beneficiary of his RRSPs. As a result, the RRSPs passed directly to Ms. Kuchta and did not form part of the estate. The amount she received was $305,657.00.
Following the date of death, an assessment was levied in respect of the deceased’s 2006 taxation year. The amount was for $55,592.00. There were insufficient assets in the estate to pay the amount. This resulted in the Minister of National Revenue relying upon ss. 160(1) of the Act to seek payment from Ms. Kuchta.
Ms. Kuchta’s position was based upon a purely technical reading of the charging language in ss. 160(1). In essence, she argued that subsequent to Mr. Juba’s death, she ceased to be his “spouse”. Since the transfer of the property to her took place immediately after Mr. Juba’s death, all of the requirements of ss. 160(1) could not apply to her.
This argument raised some interesting questions. First, when assessing whether parties are spouses, do you make the assessment at the time of transfer or at some later time? In the context of a beneficiary designation, is the time of transfer at the time the designation is completed, which will be before death and most certainly at a time when the parties are “spouses” of one another, or at the time the property is delivered pursuant to the beneficiary designation, which will be after the death of one of the parties when the spousal relationship has ended. The Court concluded, you make the determination of whether the parties are related at the time of transfer, which in this case was at the time the beneficiary designation was completed. This could have ended the analysis. However, the Court went on to make some interesting comments about the status of a “spouse” after death.
In the context of ss. 160(1) the Court stated that:
There is nothing in the Act that would indicate that Parliament intended to give relief from subsection 160(1) to transfers of property on death. In fact, the opposite is true. Paragraph 160(1)(c) causes subsection 160(1) to apply to transfers to anyone who was dealing at non-arm’s length with the transferor. Paragraph 251(1)(b) deems an estate to deal at non-arm’s length with any beneficiary of the estate. The combined effect of these two paragraphs is that anyone who receives property under a will is caught by subsection 160(1) whether or not they would otherwise deal with the deceased at arm’s length. Thus, for example, a charity that receives a bequest from a tax debtor under a will is caught by subsection 160(1) despite the fact that that same charity would not be caught had the deceased made the gift during his or her lifetime.
In summary, there are two different meanings of the word “spouse”: one legal and one colloquial. A contextual analysis shows that Parliament has used both the legal and colloquial meanings in provisions in the Act involving transfers of property on death. This use of both meanings demonstrates that there is a textual ambiguity in the meaning of the word “spouse” in subsection 160(1). Given that ambiguity, it is appropriate to give weight to the purpose of the subsection. The purposive analysis points strongly in favour of an interpretation of “spouse” in subsection 160(1) that includes widows and widowers. Accordingly, I find that the word “spouse” in subsection 160(1) includes a person who was, immediately before the tax debtor’s death, his or her spouse.
The upshot of this blog is to remind readers that where an estate is insufficient to satisfy the tax liabilities of a deceased individual, the CRA has the power to look to the designated beneficiary of property to satisfy the deceased’s tax debts. This may seem contradictory to my last blog where I referred to a case in which the beneficiaries of an estate were left with having to satisfy the tax liability associated with an RRSP, while the designated beneficiary of the RRSP got to walk away with the full value of the RRSP. The important distinction is that in the latter case there were sufficient assets in the estate to pay the deceased’s tax debts, while in the Kuchta case there were not. From a planning perspective, the important point to take away from these decisions is to consider where the liquidity will come from to pay your tax debts on your death and if there is insufficient liquidity, to consider where might CRA be able to look to have your tax debts paid. For some beneficiaries tax debts may mean no gift such that, as the saying goes, don’t count your chickens…