My mother’s will was never probated. Do I owe tax?

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Dear Nancy Woods,

My mother passed away a number of years ago and her only asset was her RIF account. I was her sole beneficiary and she left her RIF to me.

Since there was nothing else in her estate the will was not probated. Her sister, who also has since passed away, was the executrix.

I received a query from Revenue Canada as to who the executor of my mother's estate is. Since the will was not probated I don't think a tax return was filed and there may be tax owing.

My question is, who is responsible for the tax bill?

Signed,

Mary

Dear Mary,

This is an unusual case but the amount that was in your mother's RIF at the time of her death is deemed as deregistered and classified as income. A T4RIF slip would have been issued and a final tax return should have been filed. In the event that there are no other assets in the estate, then the CRA can make the beneficiary responsible for paying any tax owing.

There can be late filing penalties applied if a return was not filed, plus interest on any past due balance. You need to seek professional legal and tax advice immediately in this matter.

This is an example of why I advise people to be extra careful about naming a beneficiary to a registered plan that is not their spouse. If you name your spouse, there is not a deemed deregistration of the account; if you name someone other than your spouse, the assets are taxable as income but pass in their entirety to the beneficiary. The tax burden is the obligation of the rest of the estate and as shown in this case, if there is no other assets to pay the tax, the beneficiary is responsible.

I have seen something similar where a mother with two children named one child the beneficiary of her RIF and the other child was to receive the investment account. The accounts were both worth about $400,000. Upon her death, one child got the $400,000 from the RIF account, while the other had to pay the probate fee on those assets, as well as the tax bill on income of $400,000 as noted on the T4RIF! In the end things were not equal as she intended and these siblings are no longer on speaking terms.

Please be aware of this estate planning wrinkle and seek professional estate advice. You may think you are saving probate costs, but the end costs can be greater than what you are trying to save.

Nancy

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.