First Published by the Canadian Tax Foundation in (2016) 6:2 Canadian Tax Focus

The deemed disposition of property on death can create a mismatch between the person who receives the property and the person who pays any associated tax. A classic example is that in which a mistress is the beneficiary of an RRSP, and the wife, who is the sole beneficiary of the estate, effectively bears the burden of the associated tax liability. Although there is generally no solution to such a problem other than a carefully drafted will, the court in Morrison Estate (Re) (2015 ABQB 769) took a novel approach: it applied the common-law principle of unjust enrichment and the remedy of constructive trust. This judgment is not being appealed.

The deceased had four children, and his estate was to be divided equally between them, except that the share given to one son, Robert, was to be reduced by $11,000 that Robert had received earlier as a loan. The $11,000 left over was to be divided equally between the deceased’s grandchildren. In addition, the deceased designated another son (Douglas) as the beneficiary of a RRIF. The problem was that the estate was required to pay the tax liability associated with the disposition of the RRIF, with the result that the estate was unable to fulfill the specific bequests to the deceased’s grandchildren.

After finding that Douglas was not holding the RRIF in trust for the estate under the doctrine of presumption of resulting trust, Graesser J found, on a balance of probabilities, that the deceased did not intend that Douglas benefit from the estate paying the tax arising from the RRIF. Accordingly, Graesser J found that the common-law principle of unjust enrichment applied: the tax paid by the estate conferred a benefit on Douglas, who was unjustly enriched by that payment, to the detriment of the estate. Although the estate was under a legal obligation to pay the associated tax, it was under no legal obligation to Douglas to pay it for him. Graesser J found that the deceased was mistaken about, or unaware of, the tax consequences of the RRIF beneficiary designation and that the deceased would not have wanted any tax related to the RRIF to be paid by the estate. Graesser J found that a constructive trust existed in respect of the proceeds of the RRIF equal to the amount of tax paid by the estate on account of the RRIF, and Douglas was ordered to reimburse the estate for the tax that it had paid on his behalf. Although Graesser J recognized that his approach in this case might be viewed as extraordinary, it is permitted under Alberta’s Judicature Act, which gives the courts broad discretion to grant equitable remedies.

Graesser J commented on his inability to question the deceased on his understanding of the tax implications of the RRIF beneficiary designation and his intentions as to who was to ultimately bear the associated tax. Guesswork about such intentions was the only option in the circumstances, but the deceased could have avoided this uncertainty by carefully drafting a will that took into account the tax consequences of beneficiary designations. The court expressed concern about whether investment advisers are providing this type of tax information to their clients.

If beneficiaries of an estate find themselves in a similar situation and it is agreed that one beneficiary is to pay a portion of the taxes assessed in the estate, it may be prudent to obtain a court order properly characterizing the payment. Otherwise, the payment could be considered a contribution, thereby tainting a graduated rate estate.

This post is intended to provide general information concerning developments in the law and is not intended to provide legal advice in respect of any particular situation.