Estate Debt Implications
The following strategies and concepts are for discussion purposes only. Some or all of these may not apply in your circumstances but are highlighted to show the potential of estate planning to minimize taxes and debt... at death and while alive!
1) A client passed away a number of years ago with a large tax shelter-related debt. His Notices of Objection were fully up to date so at the time of his death there was no action CRA could take to collect the debt. The debt sits in a holding pattern until all potential appeals are settled... just like yours.
However, CRA is quick to point out that the estate is responsible for repayment of the loan and any executor who pays out the estate assets or any beneficiary in receipt of estate assets is liable to pay the debt personally.
But let's look at this client's estate asset situation. At the time of his death his spouse was joint owner of their home, investment accounts, bank accounts and vehicles. By law, those are not estate assets because his spouse jointly owned them so she became 100% named owner of the assets. Had they owned a vacation property or recreational vehicle those assets likely would have been joint as well.
Further she was the named beneficiary of his pension and RRIF. By law those are not estate assets and must be distributed to his spouse. In her case, the assets were transferred tax-free to registered pension/RRIF's in her own name for them to be managed as before... tax-sheltered and the income now taxable in her name. If he had life insurance on himself, the proceeds would have been the beneficiary's, not his estate's.
At the completion of the required asset distribution process, his estate legally did not have a dime of financial assets (as they were hers) but did have a load of CRA debt that will probably be written off or forgotten about. Why? Because CRA and any other creditors have $0 assets in the estate to go after and no one to take legal collections action on. Do the executor and his spouse really care if the estate is never technically 'settled'? Not really. Do you think they are going to volunteer to pay debts accrued by someone else? NO!!!
2) Husband and wife both have significant CRA debts... one passed away. As in the 1st case both were joint owners of financial property and beneficiaries of RRSP's/RRIF's/pensions. When he passed away his estate was asset-less.
Here's the difference from case 1, although she doesn't owe her husband's debt, she still owes her own significant CRA debt (just like all of us reading this, irrespective of death considerations). But she does not want CRA to get her assets and does not want to leave her daughter in the uncertain position of dealing with CRA on her estate assets. So she added her as joint owner of her bank accounts and today lives with much more peace of mind.
Arguably, that is sensible estate planning with or without CRA issues, but even if alive at the time CRA tries to collect, there is a strong case that CRA cannot take legal action to collect joint assets, almost certainly bank and investment accounts but possibly real estate, too, depending on when and why the joint owner was added, or gifted the property.
As a cautionary note, CRA claims that under Section 160 of the Income Tax Act, they could go after the tax debt from the joint owner and/or the new owner if a non-arm's length transfer was completed or if the transfer was for less than market value. Parties need to be aware of all ramifications of this potential strategy.
3) What about estate asset strategies that fall outside the cases, above?
a) Some assets are creditor proof, whether alive or dead. An excellent example is insurance products like segregated (i.e. investment) funds if the proper beneficiary designations are in place and that one's creditors cannot prove they were placed there to frustrate legal actions to collect. This one can be tricky, so it's best to consult with experienced insurance advisers on this strategy. Contact us for recommendations.
b) Some assets are not easily traceable to the owner, are off the radar. Examples are some accounts outside Canada; also hard assets like gold and silver, coloured diamonds, gems, art; also digital currencies. We have contacts in these fields if you have an interest.
Besides being less traceable, who's to say that Mrs. X's gold IS NOT jointly owned by her spouse. Assets acquired during marriage are equally owned by spouses so there is a justifiable position that the asset is not the estate's. It can be speculated that a lawyer or creditor like CRA may have a different position so it is advisable for parties to consider all their options before deciding the course.
Probably you get the idea... estate planning is for survivors, AND for the living. Waiting for Canada Revenue Agency to be in position to take legal action may be too late. To optimize one's situation explore the alternatives 1) well before appeals to Tax Court are complete (if contemplating going that direction) and 2) at least a year before going the route of insolvency trustees.
Legal opinion regarding estate debt implications is in this site's MEMBERS section under Solutions and Strategies