All About Estates

A Taxing Decision for Estate Planners

This Blog was written by Mélina Konzak, Estate and Trust Consultant, Scotiatrust 

Like most new case law delivered right before the holiday season, the decision rendered by the Superior Court judgment of The Estate of Caron v. Malenfant appeared at first to be swept under the rug. However being the controversial decision it has revealed itself to be, once published in Québec’s leading law journal (l’Express SOQUIJ) in early February, the judgment has quickly been making waves throughout Québec’s legal community, in particular amongst Québec Notaries, the profession most targeted by this judgment.

The facts of the case are the following: the Notary is invited by the testator’s family to do a bedside will at the hospital. The testator is terminally-ill and leaves behind her mother, brothers and sisters as well as her husband. The Notary requests and receives a medical attestation that she is mentally capable to draft a will. The Notary receives instructions from the testator to bequeath all four of her revenue buildings to her mother, brother and sisters while leaving the residue of her estate to her spouse.  The standard particular bequest clause that reads in the Notary’s will states that the gift of the four buildings is conditional upon the payment by the beneficiaries to pay any debt attached to the buildings, however without specifying in the same clause that the capital gains taxes generated by the deemed disposition of the buildings upon death will be charged to the estate and its residue beneficiary (only mentioning in general terms in the following paragraph that all tax debt is payable by the estate).

I’m sure many of you can already predict where this story sadly goes: at the testator’s passing, the spouse, also executor of the estate, does the inventory of the estate and finds that the estate is insolvent as a consequence of the clause placing the capital gains burden upon the residue of the estate. Unhappy with what he considers a surprising turn of events, he requisitions the courts to interpret the will in a way that the ‘true’ intent of the testator would be respected, in other words, whereby the capital gains burden would be placed on the beneficiaries of the buildings as opposed to himself. Furthermore, he asks the court to determine whether the Notary professionally erred in insufficiently explaining the negative consequence of the particular bequeath clause upon the spouse.

Regarding the first question, the court finds that there is no precedent that permits the court to use its powers of interpretation as to the ‘true intent of the will’ in the context of a clearly stated will. In its analysis of the second question, the court refers itself entirely to the notary’s verbal testimony.  The Notary testified that he and the client discussed during their meeting ‘’who would pay which tax debt’’ and that she ‘’knew very well who was going to pay the tax on what’’.  The Notary furthermore states that the testator told him several times that she believed the residue of her estate was sufficient to pay all capital gains taxes, but without specifying the capital gains taxes.  The court however judges that the level of advice and specificity offered verbally by the Notary to his client was inadequate and although he acknowledges that the Notary never presented his service as a tax planning one whereby a formalized estate inventory would be utilized, the court fervently insists that clearly stating to a client that a capital gain would be generated from a revenue building upon death and paid by the estate was not tax advice, but rather basic legal information.  And since the Notary did not state he did so in those specific terms in his testimony, he concludes that the Notary failed in his professional responsibility to properly advise his client and due to this professional fault, it resulted in damages for the spouse which requires compensation.

As a consequence, the court decides that the Notary should pay all the capital gains taxes in question, including the interest and penalties, representing an amount of 255,000$. Furthermore, the Notary is to pay a large part of the legal expenses incurred by the estate, totaling 54,000$. The drastic conclusions pronounced in this judgment will jolt estate planners to seriously evaluate how to prudently advise clients while also protecting themselves from such recourses. An appeal was filed for this judgment, however until the Superior Court decision is overturned, the estate planning landscape post Estate Caron c. Malenfant is one that estate planners must be weary of.

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