The Tax Court of Canada recently considered whether the term “spouse” in section 160(1)(a) of the Income Tax Act[1] [“ITA”] includes a widow(er) of a transferor tax debtor in Enns v. The King, 2023 TCC 28. Section 160 permits the Canada Revenue Agency (“CRA”) to claw back money transferred from taxpayers to non-arm’s length parties if the taxpayer owes money to the CRA.[2]
Background
Marlene Enns was designated as the sole beneficiary of her husband’s registered retirement savings plan (“RRSP”). Following Mr. Enn’s death in 2013, the $102,789.52 fair market value of the RRSP was paid out to Marlene, which she later transferred into her own locked-in retirement account.
On April 12, 2017, Marlene was assessed by the Minister of National Revenue under the ITA regarding Mr. Enns’ estate tax liability of approximately $146,000, harkening back to Mr. Enns’ 2004 through 2012 taxation years. The Minister of National Revenue alleged that Marlene was liable to pay the tax debt owed to the CRA as Mr. Enns’ spouse pursuant to section 160(1)(a) of the ITA, which provides as follows:
Where a person has … transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to (a) the person’s spouse or common-law partner or a person who has since become the person’s spouse or common-law partner … (d) the transferee and transferor are jointly and severally, or solidarily, liable to pay a part of the transferor’s tax … for each taxation year ….
However, Marlene asserted that when entitlement to the RRSP funds were transferred to her upon Mr. Enns’ death, she ceased to be a “spouse” and instead became a widow. The issue in the case of Enns v. The King was whether Marlene ceased to be a spouse upon the death of her husband for the purposes of section 160(1)(a) of the ITA.
Tax Court of Canada – Analysis & Decision
The court turned to two previous decisions that addressed the meaning of “spouse” in section 160(1)(a) of the ITA.
In Kiperchuk v. R., 2013 TCC 60, the court found that the status of marriage is ended by death such that a spouse is no longer a spouse at death for the purposes of section 160(1)(a). The section 160 tax assessment against the widow in Kiperchuk was therefore found by the court to be invalid.
In Kuchta v. R., 2015 TCC 289, the court engaged in a textual, contextual and purposive analysis to interpret the term “spouse” and concluded that the widow of a deceased remained a “spouse” for the purposes of section 160(1)(a) of the ITA. Accordingly, the appealed section 160 assessment was found to be valid and the widow of the deceased was liable to pay her deceased husband’s tax debt.
In consideration of the principle of judicial comity, the court in Enns v. The King followed the decision in Kuchta and found that Marlene was a spouse of her deceased husband at the time the RRSP funds were transferred to her. The funds were therefore accessible to the CRA.
Conclusion
The Enns decision appears to expand the CRA’s reach in terms of accessing estate assets after death when tax liability is owed by the estate. Accordingly, estate planners should advise clients that a registered account with a spousal designation will not necessarily “pass outside of the estate”[3] in all circumstances.
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[1] Income Tax Act, RSC 1985, c 1 (5th Supp.).
[2] The CRA may hold the transferee jointly and severably liable for the taxpayer’s tax liabilities if the following factors are met: 1. The transferor is liable to pay tax under the ITA at the time of transfer; 2. A transfer of property occurred; 3. The transferee of the property was the transferor’s spouse, a person under 18, or a person with whom the transferor was not dealing at arm’s length (such as a child); and 4. The fair market value given as consideration for the property by the transferee at the time of the transfer is less than the fair market value of the transferred property. See: Canada v Livingston, 2008 FCA 89 at para 17. See also: Inglis, Carolyn S. “Third party tax assessments and death,” Wealth Matters, June 9, 2020.
[3] An asset is said to “pass outside of the estate” when such asset is distributed or transferred outright to a surviving co-owner or, in the case of registered plans, to a designated beneficiary on the death of an individual without the requirement of a probated will.
