An Alberta widow has scored a big win for taxpayers and estate planners across the country after fighting off a claim by the Canada Revenue Agency against her deceased husband’s RRSP.
According to a CBC story on the case, the woman had already taken possession of the $102,000 account after her husband’s death in 2013, before the CRA convinced the Tax Court of Canada that the money should be clawed back and set off against the deceased’s outstanding tax bill.
The CRA relied on provisions in s. 160 of the Income Tax Act that are designed to allow for the collection of tax debts from certain close contacts of a taxpayer. However, earlier this year, the Federal Court of Appeal overturned the Tax Court ruling, concluding that the claw back mechanism was not available in this case because the widow ceased being her husband’s “spouse” at the point when he died.
Apart from giving me the chance to highlight a David and Goliath-style underdog victory, this case is also an important reminder of the value of beneficiary designations for testators.
A key plank of the widow’s argument at the Federal Court of Appeal was the fact that the RRSP funds never actually formed a part of her husband’s estate. As the designated beneficiary of her husband’s account, the money was transferred directly to her on his death, bypassing the estate and any tax obligation it owed.
Although they’re easily forgotten, the beneficiary designations on things like RRSPs, RRIFs, life insurance policies and Tax-Free Savings Accounts, are a critical part of any estate plan. Outside of real estate, these assets are frequently the most valuable single assets in many estates.
If you fail to designate anyone, the funds could form part of your estate, where they could become subject to probate and the 1.5-per-cent Estate Administration Tax otherwise payable on all assets in the estate over $50,000.
In addition to the tax savings, heirs will also thank you for designating them as beneficiaries because of the time and hassle they will avoid by staying away from the probate process. It can be a draining experience, since it routinely takes months for executors to get the court’s seal of approval via its overworked estates office, before they can start distributing assets.
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