This blog has been written by Maddi Thomas, Associate at Gowling WLG (Canada) LLP

Beneficiary designations are commonly used by individuals to allow registered retirement savings plans (“RRSP”) and other savings accounts to “pass outside of the estate”, i.e., be distributed or transferred outright to a surviving co-owner; or, in the case of registered plans, to a designated beneficiary on the death of an individual, thereby bypassing the probate process.

This used to mean that under certain circumstances, funds with beneficiary designations could be excluded from the Canada Revenue Agency’s (“CRA”) claw-back provisions under section 160 of the Income Tax Act (“ITA”). Section 160(1)(a) permits the CRA to “claw back” money transferred from taxpayers to non-arm’s length parties[1] if the taxpayer has a tax liability upon death:

160(1) Tax liability re: property transferred not at arm’s length – 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…the following rules apply… (underlining added)

You’ll note that this provision does not include the term “widow” in its definition. However, the Tax Court of Canada recently ruled that a widow(er) may now be included in the term “spouse” in Enns v The King, 2023 TCC 28.

Enns v The King, 2023 TCC 28

Peter Enns (“Peter”) passed away in 2013 with a terminal tax liability of approximately $146,000. His wife, Marlene Enns (“Marlene”), was designated as the sole beneficiary of Peter’s RRSP, which had a fair market value of $102,789.52. As discussed, beneficiary designations of an RRSP may pass outside of the estate, so the money was transferred directly into Marlene’s personal locked-in retirement account rather than being administered through the probate process. This meant that money never formed part of the estate and was not immediately available to pay Peter’s tax bill.

As the tax was not paid, in 2017, the Minister of National Revenue assessed Marlene under section 160(1)(a) of the ITA and alleged that she, as Peter’s spouse, was liable to pay Peter’s tax bill.

The CRA may hold Marlene, as the transferee, jointly and severally liable for Peter’s (the taxpayer) tax liabilities if all of the following factors are met:

• The transferor is liable to pay tax under the ITA at the time of transfer;
• A transfer of property occurred;
• The transferee of the property was the transferor’s spouse, a person under 18, or a person with whom the transferor was not dealing at arm’s length (such as a child); and
• The fair market value given as consideration for the property by the transferee at the time of the transfer is less than the fair market value of the transferred property.[2]

Marlene contested the Minister’s position, denying that the CRA could “claw back” the RRSP funds as, upon Peter’s death, she ceased to be his spouse and instead became a widow.

The Tax Court, reviewed two contradictory decisions analyzing the same issue:

• Kiperchuk v. R., 2013 TCC 60: The court found that the status of marriage is ended by death such that a spouse is no longer a spouse at death for the purposes of section 160(1)(a). The section 160 tax assessment against the widow in Kiperchuk was therefore found by the court to be invalid.
• Kuchta v. R., 2015 TCC 289: The court engaged in a textual, contextual, and purposive analysis to interpret the term “spouse”. It concluded that a widow was included as a spouse for the purpose of section 160(1)(a) of the ITA. Thus, the section 160 assessment was found to be valid and the widow of the deceased was liable to pay her deceased husband’s tax debt.

Unfortunately for Marlene, the court followed the Kutcha decision and found that Marlene was a spouse of her husband at the time the RRSP funds were transferred to her (as a widow(er) was now included under the definition of spouse). The CRA was thus permitted to access Peter’s RRSP funds.

The Takeaway:

The CRA appears to now have an extended reach in terms of accessing estate assets in cases where the taxpayer died with a tax liability. Estate planners should alert their clients that in the absence of proper planning for tax liabilities, registered accounts with a beneficiary designation may not benefit the intended recipient in all circumstances.[3]

 

[1] For example, related persons are not dealt with at arm’s length (ITA, s.251(1)).

[2] Canada v Livingston, 2008 FCA 89 at para 17.

[3] Widow Found To Be “Spouse” For Purposes Of Section 160(1)(a) Of The Income Tax Act. Nicole Cianci and Maddi Thomas, Wealth Matters, May 29, 2023.