Third party tax assessments and death

June 9, 2020 | Carolyn S. Inglis

For purposes of the Income Tax Act (the “Act”) are we still related to someone after their death? In certain circumstances, the answer to this question will determine whether a taxpayer is jointly and severally liable for the unpaid tax debts of the deceased.

Pursuant to subsection 160(1) of the Act, where a person has transferred property, either directly or indirectly, by means of a trust or by any means whatever, to a spouse, to a minor, or to a person to whom the transferor was not dealing at arm’s length, the transferee will be jointly and severally liable for the transferor’s tax liability to the extent the fair market value of the property transferred exceeds the consideration given for the property. Thus, if a taxpayer has received a transfer of property from the deceased for no consideration or for consideration less than fair market value, and the transfer was made at a time when the deceased was a tax debtor, the transferee may be liable for the deceased’s tax liability up to the value of the property he or she received.

However, a taxpayer may only be assessed pursuant to subsection 160(1) if the requisite relationship exists between the transferor and the transferee. The relationship is to be determined as of the date of the transfer, not the date of designation.[1] As such, in several decisions of the Tax Court of Canada, the transferee has tried to escape liability pursuant to subsection 160(1) of the Act on the grounds that the relationship between the transferor and the transferee was severed by the transferor’s death, and the parties were therefore dealing at arm’s length at the time of transfer.

In the recent Tax Court of Canada decision of Dreger, for example, two sisters argued that the proceeds they received as beneficiaries of their late father’s income fund were transferred to them at a time when their father was dead, and therefore no longer related to them for purposes of the Act.[2] The taxpayers took the position that their deceased father did not exist at the time of the transfer and therefore could not be related to them by blood relationship. The Tax Court determined that the blood relationship between the father and daughters did not end on the father’s death and that they continued to be related, and therefore the daughters were not dealing at arm’s length to their deceased father for purposes of subsection 160(1) of the Act.

Where the transferor and the transferee are married, the case law is inconsistent as to whether the transferee remains the deceased’s spouse for purposes of the Act. In the Tax Court decision of Kiperchuk, the Court determined that because marriage is dissolved upon death, the taxpayer was no longer related to her deceased husband at the time of transfer of his Registered Retirement Savings Plan (“RRSP”) and therefore could not be pursued for his unpaid tax liability pursuant to subsection 160(1).[3] In contrast, in Kuchta, the Tax Court found that, despite the fact that marriage ends on death, the term “spouse” in subsection 160(1) includes a person who was, immediately before the tax debtor’s death, his or her spouse; a purposive analysis of the word “spouse” in subsection 160(1) pointed strongly in favour of an interpretation that includes widows and widowers.[4]

It should be noted that section 160.2 of the Act generally applies to amounts received out of a RRSP or a Registered Retirement Income Fund (“RRIF”), regardless of the relationship between the transferor and the transferee. Pursuant to section 160.2 of the Act, a taxpayer is jointly and severally liable to pay the annuitant’s tax arising from the disposition of the RRSP/RRIF for the year of the annuitant’s death. In both Kiperchuk and Kutcha, however, there was no tax to which section 160.2 could apply because there was a spousal rollover of the RRSP/RRIF upon the death of the annuitant.

It should also be remembered that for subsection 160(1) to apply, not only must the deceased and the transferee not be at arm’s length, but there must also be a transfer of property from the deceased tax debtor to the transferee. As such, life insurance proceeds payable to a beneficiary, because they are not part of the assets of the estate, are not considered to be transferred directly or indirectly, from the tax debtor.[5] A hybrid fund may also be excluded from the application of subsection 160(1) if the overarching feature is the life insurance component.[6] However, a regular investment that is distributed outside of the estate on the instructions of the deceased will generally be caught by the broad wording of subsection 160(1) and will be considered to be transferred, directly or indirectly, by the deceased tax debtor to the taxpayer.[7]

Individuals who receive property outside of an estate as a result of the death of a family member should be cautious to ensure that they do not inadvertently inherit the tax liability of the deceased. Whether or not the transferee even knows about the tax debt is irrelevant for purposes of  subsection 160(1), and there is no due diligence defence available. As a general rule, if a transferee would have been jointly and severally liable for a taxpayer’s tax debts upon a transfer of property while that tax debtor is alive, the transferee will be liable if the transfer occurs when the tax debtor is deceased.

[1] Kuchta v R, 2015 TCC 289 at 13

[2] Dreger v The Queen, 2020 TCC 25.

[3] Kiperchuk v The Queen, 2013 TCC 60.

[4] Kuchta v R, 2015 TCC 289.

[5] Nguyen v The Queen, 2010 TCC 503.

[6] Higgins v The Queen, 2013 TCC 194.

[7] Higgins v The Queen, 2013 TCC 194.


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