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The recent case of Picard v. Estate Ligotte 2017 QCCS 330 raised the following issue: What party had to assume the tax burden resulting from the bequest of a revenue producing property to M. Picard by his late wife, Mme Ligotte? Was it M. Picard or was it the universal legatees of his late wife’s Estate? As you might guess, the universal legatees and M. Picard really did not get along too well.

We know the general principle under the Civil Code of Quebec: A legatee by particular title who accepts the legacy is not an heir, but is nonetheless seised of the property bequeathed, as an heir, by the death of the deceased or by the event which gives effect to the legacy. He is not liable for the debts of the deceased on the property of the legacy unless the other property of the succession is insufficient to pay the debts, in which case he is liable only up to the value of the property he takes.

In the case at Bar, the will was silent regarding who had to assume any income tax burden related to the particular bequest of an income producing property.  On the other hand the will did contain a clause that permitted the liquidator (who was one of a number of universal legatees) to make any elections permitted by tax laws or any other laws if the liquidator considered that to be for the benefit of one or more of the legatees or for the benefit of the estate in general.

In terms of the relevant provisions of the Income Tax Act,, sub-section 70 (5) provides for a deemed disposition on death of capital property owned by a deceased, which in principle, triggers capital gains or losses and potential recapture of depreciation, because the property is deemed to be disposed of at fair market value. Sub-section 70 (6) provides that where a capital property is transferred between spouses, there is a “spousal rollover” if certain conditions are met, namely that the deceased and his or her spouse are resident in Canada immediately before the death of the deceased and the property vests indefeasibly in the spouse within 36 months of the death of the deceased. There is no capital gain or loss or recapture of depreciation because the property is deemed to be disposed of at its tax cost. In short, the tax burden is deferred until the spouse/beneficiary actually disposes of the capital asset. However, sub-section 70 (6.2) allows a liquidator to elect not to take advantage of the spousal roll-over provisions, whereupon there is immediate recognition of the tax gain or loss, as the case may be. Such an election might be made to create capital losses or terminal losses in the deceased’s terminal year to maximize otherwise available capital losses against current capital gains.

So what M. Picard was arguing was that the liquidator of his late wife’s estate ought to have elected under sub-section 70 (6.2) to “opt-out” of the spousal roll-over provisions of the ITA.  He was arguing that because the liquidator has the responsibility of settling the deceased’s account with the Canada Revenue Agency, the underlying tax liability associated with the revenue producing property he received as a particular legacy was a debt, payable by the estate.

This view was rejected by the Court.

The trial judge reasoned that since the liquidator had the unfettered right to make such tax elections as he saw fit, the will was clear and did not require any interpretation to discern the intention of the testator: It was open to the liquidator, in his sole discretion, to make any tax election he saw fit and if he elected not to invoke sub-section 70 (6.2), so be it! I agree that this analysis is correct. It focused on the issue of the meaning of the expression “debts of the deceased”. While a particular legatee is not liable for any debt of the deceased, in the case at bar, there was no tax liability triggered on the death of Mme Ligotte because the conditions of article sub-section 70 (6) ITA were met. There was certainly a latent or underlying tax liability, but that liability would not be triggered unless and until there was an actual disposition of the property.

 I can think of a number of reasons where circumstances might dictate a different result. The most blatant example would be where the liquidator is also beneficiary and makes a tax election that confers a benefit upon himself and/or his class of beneficiaries, at the expense of another beneficiary or class of beneficiaries. Arguably, this could amount to a breach of a fiduciary duty because the liquidator has the duty to favour the interests of all of the beneficiaries, regardless of where  his own personal interest might lie.

Might there also have been arguments regarding the testator’s intention? For example: “My late wife meant that I should receive this particular interest bearing property and that she would have wanted me to get it tax-free”. The problem with this type of argument is that generally speaking, extrinsic evidence regarding the intention of a testator is inadmissible. And furthermore, the reply would be, if that was the intention of the late wife, how come she did not say so directly!