In February 2010, a woman learned she had only months to live and took steps to put her financial affairs in order. She executed a codicil naming one of her three daughters as executor of her estate. She named the same daughter the beneficiary of her RRSP, the only significant property she owned.

The woman told her daughter to use the RRSP proceeds to pay for the funeral, related family travel costs, final bills and estate administration expenses, and to distribute any residual funds equally with her two sisters.

When she died, the woman owed more in back taxes than the $76,616 in her RRSP. On receiving the RRSP proceeds, the daughter paid the expenses and distributed the rest as instructed. The Canada Revenue Agency (CRA) later assessed the daughter personally for the RRSP’s full amount.

In February 2021, the Tax Court handed down its ruling of the daughter’s appeal in Goldman vs. the Queen 2021 TCC 13.

How the CRA follows a tax debt

When someone who owes tax gratuitously transfers property to a non-arm’s length person, the CRA may use Section 160 of the Income Tax Act (ITA) to collect the tax debt from the recipient.

Consider a deceased taxpayer with an insolvent estate and an RRSP with named non-arm’s length beneficiaries. An RRSP is included in income in the terminal tax year when someone dies. The CRA will use Section 160 to collect from each beneficiary the proportionate share of tax owed from the RRSP income.

The Goldman case had an additional element: there was an existing tax debt that was larger than the entire RRSP even before the mother’s death. What is the extent of the liability for a named beneficiary in such a situation? And would receiving RRSP proceeds as a trustee make a difference?

Effect of a trust

The judge found that the three certainties for creating a trust had been met: the mother’s intention and identification of her daughters as beneficiaries were both clear, and her death caused the RRSP proceeds to fund the trust. The daughter received those proceeds in her capacity as trustee and was legally bound to carry out the terms of the trust as laid out by her mother.

As to the CRA’s contention that the daughter used her discretion to pay certain expenses instead of paying the CRA, the judge stated that she “received the RRSP proceeds to hold for the benefit of certain beneficiaries. The CRA was not one of those beneficiaries. However, that does not cause the trust to fail for certainty of object. The fact that the [government] dislikes the terms of a trust is not enough to declare it void.”

Even so, the court made it clear that Section 160 isn’t defeated by a trust. Rather, the question is whether the tax liability rests with the trust itself or with the trustee in their personal capacity. The judge said the trustee’s responsibility is to use the trust assets to satisfy tax debts, and that if those assets are insufficient, the tax collector “cannot simply seize the trustee’s personal assets.”

So who bears the tax?

Though the daughter wasn’t liable as trustee for the full RRSP proceeds, she was liable for three amounts:

  1. A total of $8,139 was paid out of an account originally opened jointly for the daughter to care for her mother. Though these payments were in the nature of final expenses contemplated by the trust terms, they weren’t paid out of the RRSP proceeds. While the judge suggested that a reimbursement might have qualified per the trust’s terms, there was no evidence of any such reimbursement to this account from the RRSP proceeds.
  2. The daughter was liable, as she conceded, for her $10,460 distributed portion of the RRSP residue.
  3. Lastly, the daughter claimed $5,000 for legal expenses for the tax appeal. The judge ruled this was the daughter’s personal expense and not an estate expense.

The judge commented that, under a different ITA section that applies to trustees, the daughter could possibly be liable for the residue distributions to her two sister beneficiaries. However, that was not pleaded by counsel for the CRA. The court didn’t assess the two sisters’ liability.

In the end, the daughter was liable for $23,599. If the two $10,460 amounts (the residue to each of the other two sisters) were added, the total would be $44,519. Deduct that from the original $76,616 in the RRSP, and that leaves $32,097. Depending on your perspective, that’s either lost tax revenue or a tax-effective way to pay final expenses.

As this case proceeded under the Tax Court’s general procedure, it could stand as a precedent, so it will not be surprising if the government appeals. Regardless, if you have a client who is the executor for someone with tax debts, it would be prudent for them to clarify their obligations with legal counsel in order to steer clear of potential personal liability.

Doug Carroll is tax and estate counsel to Aviso Wealth in Toronto.