Normally, taxes owing in respect of an RRSP must be paid by the estate, if no rollover is available. The Kuchta decision makes it clear that tax authorities can look to the beneficiary of an RRSP for taxes owing under the RRSP plan. In addition, tax authorities may be able to recover other taxes owing by the deceased from the the RRSP beneficiary.

Subsection 160(1) of the Income Tax Act makes a transferee of property who pays less than fair market value (i.e. who receives the property as a gift) liable for the tax debt of the transferor. The subsection applies to a transferee who falls into one of three categories: a spouse, a person under 18, or a person who does not deal at arm's length with the transferor. If one of these transferees receives property from a person who owes taxes, the transferee can be assessed for the difference between the price paid and the fair market value, up to the amount of the transferor's tax debt.

In Kuchta, M.E. v. The Queen 2015 TCC 289, the spouse was the beneficiary of two RRSPs worth $305,657. At the time of his death, the deceased owed taxes of $55,592. His estate failed to pay those taxes (the decision from the Tax Court of Canada does not clarify whether the estate was insolvent, or why the tax owing was not paid). The widow was then assessed under subsection 160(1) for the taxes owing by the estate.

At trial, the widow's counsel argued that she was no longer the "spouse" of the deceased, since death severed the marital relationship. Justice Graham of the Tax Court reviewed various sections of the Income Tax Act that use the word "spouse" and concluded that its use is inconsistent, and the meaning of the word depends on the context in any given section of the Act. The Court concluded that under ss. 160(1), "spouse" includes widow or widower. The Court also noted that blood relatives retain their status as relatives after death.

The Court finally noted that even if the widow was not liable for the tax debt as the "spouse" of the transferor/tax debtor, she was not dealing at arm's-length with the tax debtor, and would still be caught under paragraph 160(1)(c) of the Act. Furthermore, section 160.2 makes a transferee of an RRSP liable for taxes owed under the RRSP.

Tax Law