Receiving a large inheritance might seem like a windfall for many. What could be equally shocking is finding out that some of the money may have to go to the Canada Revenue Agency. In a decision recently issued by the Tax Court of Canada, the daughters of a deceased individual were faced with a tax bill of over $96,000 due to taxes owed by the deceased prior to his death.
The money owed
The deceased was the father of two daughters who were named the beneficiaries of a life income fund (the “Income Fund”). In his will he named the daughters as the trustees, executrices, and beneficiaries of his estate. He died on June 8, 2011. Later that summer, each of the daughters received a transfer of $96,640.96. No consideration was provided in exchange for the money. Four years later the government assessed each daughter $96,640.96 on the basis of the Income Tax Act since the father owed more than that with respect to his 2011 taxation year.
The relevant section of the Act states that when a transfer is made to someone by a trust or other means, the person receiving the money is liable for any taxes owed by the person who gave money (or provided it to the trust) when not being dealt with at arm’s length. The reason for this law to exist is to prevent people from avoiding taxes by moving their money into the hands of family or friends. Since the father owned the Income Fund, and the father owed more in taxes than the Income Fund held, the CRA sought to collect the money from the daughters.
The position of the parties
The daughters accepted that the father indirectly transferred property to them, that he was liable to pay income tax in relation to the 2011 taxation year, and that no consideration was paid by the daughters in exchange for the money. The only criteria the daughters had a contention with was whether they were dealing with the father at arm’s length at the time of the transfer. They say they were dealing with him at arm’s length. They argued that the father was dead at the time of the transfer, and was therefore not a related person under the Act, not in a blood relationship with them, and therefore at arm’s length at all times. The government argued that the relationship between father and daughters could not be taken away, even at death.
A blood relationship
The court spent some time looking at the timing of the transfer before turning to Section 251(6)(a) of the Act which looks at how people are connected by blood relationships. The Act states a blood relationship is established “if one is the child or other descendant of the other.” The daughters were obviously the children of the deceased, and as such their relationship with him did not cease upon his death. As a result of this, Section 160(1) of the Act applies to their relationship, and the money the father owed to the CRA was recoupable from the money provided to the daughters.
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