In Dreger et al v the Queen (2020 TCC25), the beneficiaries of an estate bequest appealed assessments for unpaid taxes by the deceased.

In this case, the deceased was an annuitant of a life income fund (“LIF”) and prior to his death, he designated to each of his daughters as his beneficiaries under a beneficiary designation in respect of the LIF.

In his will, the deceased named his daughters as trustees, executrices and beneficiaries of his estate.

Subsequent to his death each of the daughters received a distribution, in satisfaction of her beneficial interest in the LIF. Some 4 years later, the Canada Revenue Agency (“CRA”) assessed each of the daughters an amount of taxes owing equivalent to their respective distribution pursuant to the section of the Income Tax Act (“the Act”) which made the daughters liable for their father (deceased’s) unpaid taxes. It appears the deceased had an outstanding tax liability equal to or in excess of the distributions made.

One of the purposes of the section of the Act applicable to this case is to prevent a taxpayer from transferring his property to a related person in order to thwart the CRA’s efforts to collect the tax that is owed by the taxpayer. As the Court noted, it “thwarts attempts to move money or other property beyond the tax collector’s reach by placing it in presumably friendly hands”.

The Court noted that the daughters did not dispute that the deceased had a tax liability at the time of death, that they had received a distribution after his death as designated beneficiaries, and that they paid nothing for the distribution, all criteria for the application for this section of the Act to be invoked. They challenged the final criterion – that the deceased and the beneficiaries were not dealing with each other at arm’s length at the time of the transfer.

The daughters contended that their father was in effect dead at time of transfer, in fact did not exist and therefore could not be “related” to them at time of transfer. Fascinating!

The Court saw thru this argument and rejected the notion that the blood relationship between the father and his daughters terminated with his death. They were still his daughters! The appeal was denied.

Recently, I wrote about clearance certificates. An executor, as the legal representative of the estate, is required to obtain a clearance certificate before distributing property that they control. Where the executor fails to obtain a clearance certificate, they are liable for any unpaid amounts in respect of any property distributed. I suspect this was not even contemplated in this case as that would land the daughters in the same position.

Happy Reading