While being the beneficiary of someone’s will might feel like a windfall to some, the associated taxes that may come with it can feel like a burden, especially if they are a result of the deceased’s unpaid taxes. What might further frustrate things is if the tax bill arrives years after the money was distributed, as was the case in a recent decision heard by the Tax Court of Canada.
Four years go by
The two appellants in the decision were the daughters of the deceased. He died on June 8, 2011 and was the annuitant of a life income fund (“the income fund”) He had designated the daughters as the beneficiaries of the income fund prior to his death.
When the father died, each of the daughters was transferred $96,640.96 later that summer. They provided no consideration in respect of the transfer.
Four years went by, and on July 3, 2015, the Canada Revenue Agency assessed each of the daughters $96,640.96 on the basis that their father had an outstanding tax liability of not less than the amount of money they received.
The law
The CRA was relying on Section 160 of the Income Tax Act which states that when someone transfers property to a person with whom they are not dealing with at arm’s length, the person who benefits from the transfer may be liable for any taxes owed by the person making the transfer. The idea behind that section of the Act is to prevent people from transferring property in order to avoid paying taxes.
The daughters argued that they were dealing with each other at arm’s length at the time of the transfer. They argued,
“The Appellants’ position is that at the time of the transfer (the father) was now dead, did not exist, and therefore he was not a related person within the meaning of Subsection 251(6), and he therefore was not in a blood relationship with them and therefore was at arm’s length at all times, to the extent that he can of course again even be said to exist.”
The CRA’s position was that even if the father was dead at the time of the transfer, the appellants are his daughters and that their relationship is not one governed by a contract, and the relationship could not be taken away.
The court’s decision
Despite the daughters’ position that their relationship with their father was terminated when he died, the court determined that even though the father had died before the transfer, he was still their father. The court said, “It does not matter that the transfer began before his death, crystallized on his death and was completed after his death. It was a transfer between persons connected by a blood relationship.”
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