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tax matters

There’s no shortage of stories about estate planning and estate administration gone wrong. A recent decision by a judge put to rest what amounted to years of problems experienced by a family around an estate. Let me share the story and the lessons.

The facts

In 1970, Mr. M signed a will that named his wife, Mrs. M, as executor, and left everything to her as long as she survived him. Failing this, half the estate was to go to Mr. M’s sister, and half to Mrs. M’s siblings. As it turns out, Mr. M’s sister predeceased him, so her share would go to her children – the nieces and nephews of Mr. M, in the event Mrs. M wasn’t around to inherit the estate.

In 1978, Mr. and Mrs. M separated, and never did reconcile. In their separation agreement, Mrs. M agreed that she would have no further claim on any property owned by Mr. M and that she’d renounce any right to the administration of his estate.

In 2008, Mr. M died. At that time, Mrs. M signed a document renouncing her right to administration of the estate and acknowledging she had no claim on the assets of his estate. Since Mrs. M apparently had no claim to Mr. M’s estate and since Mr. M’s sister had already passed away, the nieces and nephews of Mr. M thought that they might have a right to his estate – but they weren’t sure because Mrs. M was still alive.

Issue 1

So the nieces and nephews sought clarity from the Court of Queen’s Bench of Saskatchewan as to whether the estate should be divided among the alternate beneficiaries (Mr. M’s nieces and nephews, and Mrs. M’s siblings), as though Mrs. M had predeceased her former husband, or whether it should be divided as though Mr. M died without a will (as an intestacy).

The judge said that it wasn’t that simple. There are court cases from around Canada to the effect that a separation agreement does not revoke a will, which would suggest that Mrs. M should inherit the entire estate. Not only that, Mrs. M was still the executor. Yet, the judge also wanted to ensure that the nieces and nephews benefited under the will. In the end, a mediated settlement was reached and the parties agreed that Mr. M’s estate should be divided 55 per cent to Mrs. M, and 45 per cent to the nieces and nephews.

The lessons to be learned here are twofold: First, if you ever separate or divorce, prepare a new will because your old will is not revoked. If Mr. M had done this, he could have revised his beneficiaries to exclude Mrs. M if that was his intention.

Second, if you sign a separation agreement, get legal advice on waiving your right to your former spouse’s estate. In this story, Mrs. M’s renouncing of this right didn’t actually achieve that result. So this type of provision in an agreement may not be effective.

Issue 2

After Mr. M’s death, Mrs. M remained the executor and hired an accountant to calculate the taxes owing from Mr. M’s death. She was told that the taxes would be $25,000. So she distributed to the nieces and nephews their share of the estate, but held back $25,000 to pay the taxman.

The problem? It turns out that the taxes and fees were actually $60,772. So Mrs. M went back to the nieces and nephews and asked for money back to pay their share of the taxes, interest and fees owing ($4,720 each), to which they said “no."

Mrs. M wanted the court to provide a summary judgment that would see the other beneficiaries sharing the tax burden and fees with her. In a decision handed down on Dec. 3, 2019, the judge sided with the other beneficiaries.

Section 159 of our tax law places the liability for the tax bill on the executor(s), not the beneficiaries, and requires the executor to obtain a “clearance certificate” from the Canada Revenue Agency. A clearance certificate certifies that taxes that can be reasonably expected to be owing have been paid or that security has been provided to CRA. Mrs. M hadn’t obtained a clearance certificate before distributing the assets of the estate.

The tax law doesn’t address whether the beneficiaries need to indemnify the executor for the amount owing, but the judge ruled that the beneficiaries are not obligated this way.

The lesson here? If you’re an executor, be sure to get a clearance certificate before making a final distribution to the beneficiaries. You might also speak to a lawyer about the idea of entering an agreement with the beneficiaries that they will indemnify you against any tax liability that might arise later.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.