Tag: tax liability
This week on Hull on Estates, Noah Weisberg and Nick Esterbauer discuss a recent decision of the Tax Court of Canada that addresses the use of property transferred to spouses to satisfy tax liabilities pursuant to the Income Tax Act. A copy of the Kuchta v. The Queen decision is available here: http://bit.ly/1QcncGi
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In Kuchta v The Queen, 2015 TCC 289, the Tax Court of Canada had occasion to consider some interesting issues with respect to the meaning of “spouse” in the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (the “ITA”) and a spouse’s joint and several liability for a deceased spouse’s tax liabilities on death.
Ms. Kuchta was married to Mr. Juba (the “Deceased”) at the time of his death in 2007. Ms. Kuchta was the designated beneficiary of two of the Deceased’s RRSPs, and she accordingly received $305,657.00 upon the Deceased’s death. The Deceased was assessed by the Minister of National Revenue (the “Minister”) and found to owe $55,592.00 in respect of his 2006 taxation year. After the Deceased’s Estate failed to pay that amount, the Minister assessed Ms. Kuchta for the amount owing, pursuant to s. 160(1) of the ITA. This section provides that where a person has transferred property to their spouse, the transferee and transferor are jointly and severally liable to pay the transferor’s tax.
Ms. Kuchta’s position was that, three of the four requirements of s. 160(1) were met, but that the last requirement had not been met. Ms. Kuchta stated that she was not the Deceased’s spouse at the time of transfer of the RRSPs, as it occurred immediately after the Deceased’s death, at which point their marriage had ended. The Court, therefore, had to consider (a) when should the relationship between Ms. Kuchta and the Deceased be determined; and (b) does the word ‘spouse’ in s. 160(1) include a person who was, immediately before a tax debtor’s death, his or her spouse?
With respect to issue (a), if the relationship is determined at the time that Ms. Kuchta was designated as beneficiary of the RRSP, they would have been married, whereas if the relationship were determined at the time of transfer, they would not have been married. The Court easily concluded that the relationship should be determined at the time of transfer. It then had to determine whether the word “spouse” in s. 160(1) is sufficiently broad to include Ms. Kuchta at the time of transfer. That is, whether it included widows and widowers.
The Court undertook a “textual, contextual and purposive analysis of the word ‘spouse’ in subsection 160(1).” After a lengthy and thorough analysis, the Court concluded that the word ‘spouse’ must have been intended to include widows and widowers. It found that Parliament used both the legal and colloquial meanings of the term in the ITA, which differ from each other, thus presenting conflicting interpretations and ambiguity. However, the purposive analysis was found to point to an interpretation that includes widows and widowers.
Ultimately, therefore, Ms. Kuchta was found jointly and severally liable for the Deceased’s unpaid taxes, as a result of the beneficiary designation of the Deceased’s RRSPs. It will be interesting to see how this case applies going forward, and we should keep in mind that the Minister may be able to collect on unpaid taxes from the beneficiary of a Deceased’s RRSP.
Thanks for reading.
Yesterday I blogged about deciding who to leave your cottage to in your Will. Today I thought I would discuss 3 different ways of transferring the cottage.
By Specific Bequest
The most obvious way is to make a specific bequest of it in your Will, leaving it to a named beneficiary (or beneficiaries who will own it jointly). The beneficiaries will receive direct ownership of the property and it will be theirs absolutely, do use as they please.
If there will be multiple beneficiaries, you should give some thought to whether you would like them to receive the cottage as joint-tenants or tenants in common – this will affect what happens to the cottage on the death of one of the beneficiaries. If you think you would like them to own the property jointly, then this will need to be taken care of at the planning stage.
By Testamentary Trust
Another option is to leave the cottage in a trust – in which case you would designate how long the trust is to remain in existence and who the ultimate beneficiaries would be.
This option is useful if you would like your spouse to continue to have use of the cottage during his or her lifetime, but would then like it to go to your children. This option also allows you to put conditions on the term of ownership as well as to provide for the continued maintenance of the cottage.
By Inter Vivos Trust
This option involves transferring the cottage into a trust for the beneficiaries during your lifetime. The advantages of this option are that your estate won’t have to pay probate fees or taxes on the
property after your death. On the other hand, you may trigger tax liability while you are alive.
Different options will work for different people – if you have a cottage, this is definitely a topic you should discuss with an estate planning expert.
Thanks for reading!
Megan F. Connolly
With the long weekend nearly upon us, what better time to discuss the family cottage?
If you transfer your cottage to your children while you are living, you will be deemed to have disposed of it at its fair market value and be liable for the resulting capital gains tax which, depending on how long you have owned the cottage and how much it has appreciated, might be astronomical.
One way of reducing tax liability is to take advantage of the principle residence exemption. In doing so, the size of the capital gain will be calculated using a formula involving the number of years you have owned the cottage and the number of years it has been designated as the principal residence.
Keep in mind, however, that after 1982, spouses could no longer designate different properties as their principal residences and, as a result, consideration should be given to the increase of value in your city residence – if the capital gain on it is greater than on your cottage, designating your cottage as your principal residence may end up increasing, not decreasing your tax liability.
Another option, of course, is to simply allow your children to inherit the property after both you and your spouse have died. At that time, there will hopefully be sufficient assets in the estate to pay the capital gains taxes which arise.
In any event, if you have a cottage which has increased substantially in value, it might be worth your while to discuss ways to reduce tax liability with an expert in estate planning.
Have a great long weekend!