In a recent Tax Court of Canada decision, two daughters were found liable for their father’s tax debt after they received payments from his life income fund after his death. The daughters had tried to argue they ceased being the father’s daughters after his death because he was no longer alive.
The father had two daughters. He died on June 8, 2011.
The father had a life income fund (“LIF”) and, prior to his death, he designated each of his daughters as hisbeneficiaries under the beneficiary designation in respect of the LIF.
A LIF is a type of registered retirement income fund offered in Canada that can be used to hold locked-in pension funds as well as other assets for eventual payout as retirement income.
After the father’s death, on July 26, 2011, $96,640 from the LIF was indirectly transferred to each of the daughters in satisfaction of their beneficial interest.
On July 3, 2015, the Canada Revenue Agency (“CRA”) assessed each of the daughters $96,640 on the basis of subsection 160(1) of the Income Tax Act (the “Act”).
Section 160(1) of the Act states that where a transfer of property is made, directly or indirectly, by means of a trust or by any other means, to a person with whom the person was not dealing at arm’s length, that person becomes liable to pay any outstanding taxes owed to the CRA, up to the amount of the transfer.
The CRA made this assessment because the father had an outstanding tax liability of more than the amount transferred to the daughter for his 2011 taxation year.The CRA therefore wanted the daughters to use the amount they received from the LIF to pay for their father’s outstanding tax liability.
The daughters agreed that their father indirectly transferred property to them and that their father was liable to pay income tax in relation to the taxation year in which the transfer took place. However, the daughters stated that they were not liable to pay their father’s outstanding taxes, because they were dealing with the father at arm’s length at the time of the transfer.
The daughters argued that, at the time of the transfer, the father was dead, did not exist, and thus he was not a related person within the meaning of s. 251(6), and he therefore was not in a blood relationship with them and was at arm’s length at all times.
The CRA argued that the daughters were, at all times, the daughters of the father and that relationship cannot be taken away, even by death.
The only issue was whether the daughters were dealing at arm’s length with the father at the time of the transfer.
Tax Court of Canada Decision
The court explained that, in interpreting s. 160(1) of the Act, it must also look at s. 251.
Subsection 251(1) of the Act deems related persons not to deal with each other at arm’s length. It also deems a taxpayer and certain trusts not to deal at arm’s length. Finally, it provides that, in any other case, it is a question of fact whether persons not related to each other are, at a particular time, dealing with each other at arm’s length.
Paragraph 251(2)(a) of the Act provides that related persons or persons related to each other are individuals connected by blood relationship, marriage or common-law partnership or adoption. Paragraph 251(6)(a) of the Act states that persons are connected by blood relationship if one is the child or other descendant of the other or one is the brother or sister of the other. The court stated:
“Pursuant to paragraph 251(6)(a), persons are connected by blood relationship “if one is the child or other descendant of the other”. There is no ambiguity in the wording of this provision. A parent and his or her children are connected by a blood relationship.
The [daughters] are the children of [the father]. This relationship did not end on [the father]’s death. The [daughters] continue to be the children of [the father].
[…] 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. Such persons are deemed under paragraphs 251(1)(a) and 251(2)(a) not to deal with each other at arm’s length. Thus the [father] transferred the property to [the daughters] with whom he did not deal at arm’s length.”
As a result, the court found that s. 160(1) applied to each of the transfers from the father to the daughters and they were liable for his tax debt in the amount transferred to them under the LIF.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
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