Litigation, Taxation law

Case Comment: Plan for unintended consequences!

Oct 9th, 2013

By Barry Landy

Boudreault v. Laforest 2013 QCCS 4575

When Johanne Boudreault’s father died, she was happy to learn that he had left her his RRSPs. What she didn’t count on was the family dysfunction that resulted.

Her father’s universal legatee was his long-time common-law spouse, Mme Laforest. Even though Mme Laforest was not Johanne’s biological mother, she always treated her as her daughter.

When M. Boudreault died, the amount in his RRSPs, some $227,000, was included as income in his terminal tax return. As a result of this inclusion, and other things, a tax bill of $121,000 resulted and surprise, Mme Laforest had no liquidity to pay the taxes, although she had inherited the family residence, which had a value of $300,000. So she asked Johanne to pay the taxes owed by her late common-law spouse and Johanne did so, thinking that Mme Laforest, her almost mom, would repay her when she sold the house. Of course, there was no paperwork signed reflecting who was really paying the taxes.

Unfortunately things did not work out as Johanne thought they would. Mme Laforest sold the house and went to live in a residence. She never repaid Johanne, who was forced to sue to recover the amount she thought she had advanced to pay her late father’s final tax bill.

In terms of the taxes owing by her late common-law spouse, Mme Laforest took the position that because Johanne had inherited the RRSPs, she should also have the obligation to pay the income taxes that arose as a result of the inclusion of the RRSP proceeds in the assets of the deceased.

The Superior Court disagreed. As Justice Pierre Labrie explained, the deceased was deemed to have received an amount equal to the fair market value of the assets in the RRSP immediately before the date of death, according to paragraph 146 (8.8) (a) of the Income Tax Act (and its Quebec Taxation Act equivalent).

Accordingly, since the tax debt is deemed to arise immediately before the date of death of the taxpayer, it is the estate (the universal legatee) and not the recipient of the RRSP proceeds that bears the tax burden.

As it happens, there are isolated judgments suggesting the contrary, namely that the beneficiary who received the RRSP proceeds should bear the tax, but these decisions were distinguished on their particular facts by the trial judge, and rightly so, I would say. In all cases, noted the Trial Judge, one must carefully read the relevant clause and try to ascertain what was the true intention of the testator. In the case at hand, the Trial Judge readily concluded that this intention was clear and the testator clearly wanted his common-law spouse and not his daughter bear the tax burden.

Mme. Laforest also tried to argue that her step-daughter was liable to pay the taxes according to article 739 of the Civil Code, which provides by way of exception that while a legatee by particular title is not liable for the debts of the deceased, he or she becomes liable if “the other property of the succession is insufficient to pay the debts”, but as it happened, the value of the other property of the deceased was more than sufficient to pay his debts, so this argument failed as well.

What was truly unfortunate in this case for Mme Laforest was that she was not legally married to M. Boudreault. In that circumstance, as part of her claim for family patrimony, Mme Laforest would have been entitled to receive as a creditor an amount equal to ½ the RRSP proceeds, and an amount equal to ½ the value of the family residence (over and above the fact she also would have inherited the family residence). So while that marriage license may be a small piece of paper, it would have had a dramatic effect on the outcome.

The moral of the story: Plan for unintended consequences! Plan for potential disharmony!

Barry Landy is a senior litigation lawyer at Spiegel Sohmer Inc., who has been involved in numerous disputes involving heirs battling over the disposition of assets following a death.