After years of battling the Canada Revenue Agency in court, Marlene Enns gets to keep more than $100,000 in retirement savings left to her by her late husband in a ruling that helps shield widows and widowers from having to pay their deceased partners’ tax bills.
The case hinged on a small provision in the Income Tax Act, Section 160, which says that if an individual transfers property to their spouse or common-law partner at less than fair market value, the CRA has the power to hold the spouse or common-law partner responsible for any outstanding tax debt, and any funds they received can be clawed back.
Ms. Enns argued that she ceased being a spouse the moment her husband died, so she should not be responsible for his tax debt. The Federal Court of Appeal heard the case in Edmonton late last year and agreed with Ms. Enns.
“A person is only a ‘spouse’ for the period during which that person was married and, therefore, when a marriage ends, a person ceases to be a ‘spouse’,” Justice Wyman Webb wrote in the Jan. 21 ruling.
The decision settles a long-standing legal debate over whether widows and widowers fall under the definition of “spouse.”
“This represents a win for widowers and estate planning,” said Maddi Thomas, an associate at Gowling WLG who specializes in estate law.
Widows often face disadvantages in Canada’s tax system, such as being unable to benefit from pension income splitting. Statistics Canada reports that approximately 20 per cent of Canadians over 65 are widowed – almost 80 per cent of them women.
“This case highlights how effective estate planning strategies can help minimize an estate’s tax burden and the potential burden for widowers,” Ms. Thomas said. “Any widower who directly inherits can feel a little bit more confident that that money’s not going to be clawed back.”
Ms. Enns’ case involved the retirement savings of her late husband, Peter Enns. He had a registered retirement savings plan worth $102,790 and named her as the beneficiary.
Naming a beneficiary allows RRSP assets to pass outside an estate, transferring them directly to the beneficiary and avoiding probate tax, which was the case with Ms. Enns after her husband died in 2013.
But in 2017, a CRA assessment determined Mr. Enns owed nearly $150,000 in income tax at the time of his death.
The agency tried to collect the amount Ms. Enns got from her husband’s RRSP to settle his debt under Section 160, arguing that she was still considered his spouse.
She challenged this in court, contending that the definition of “spouse” does not include a widow. The Tax Court of Canada ruled against her in 2023, citing a 2015 case that defined “spouse” to include widows.
However, when the case reached the Federal Court of Appeal, the higher court disagreed. It ruled that a spouse is defined as a married person and that marriage ends when one partner dies.
As a result, the CRA could not use Section 160 to collect from Ms. Enns and the agency was ordered to cover her legal costs.
Chad Brown, Ms. Enns’ lawyer, said that although the sum in question may not seem significant, the case is a win for all Canadians who outlive their partners.
Across Canada, this ruling represents “millions of dollars that is no longer able to be seized in this way by the Canada Revenue Agency,” Mr. Brown said.
Jamie Golombek, the managing director of tax and estate planning at CIBC Private Wealth, said “most lawyers and estate planners, if not all, are very pleased with the decision.”
He said the biggest thing to take away from this case is the importance of naming beneficiary designations not just on your RRSPs, but on registered retirement income funds, tax-free savings accounts, first home savings accounts and life insurance policies. They offer potential tax savings by reducing probate fees and can shield survivors from their deceased partners’ tax obligations, he said.
