Sep
6
By Fin MacDonald Fin Tax Service
As regular readers of the Beacon know, I regularly read the decisions of the Tax Court of Canada (TCC). This enables me to keep up to date on the latest interpretations of the Income Tax Act. It also offers lessons that all of us can benefit from. This month I’m going to discuss two TCC decisions: O'Callaghan v. The Queen (2016 TCC 169); and Melman v. The Queen (2016 TCC 167).
O’Callaghan is a case involving a woman, Sylvia O’Callaghan, whose brother Siegfried Starzyk died in 2007. Sylvia was named as the beneficiary of two Registered Retirement Savings Plans (RRSPs) that Siegfried owned at the time of his death. The two RRSPs had a value, on Siegfried’s death, of $274,050.83. Bruno Starzyk, Siegfried and Sylvia’s brother, was appointed executor after Sylvia renounced the administership of the estate.
On the day a person dies, what is called a ‘deemed disposition’ comes into effect. If the deceased has a surviving spouse (which Siegfried didn’t) the assets in the estate may be transferred to the surviving spouse. Retirement Income Funds (RIFs) and RRSPs may be transferred directly to a spouse, or to a child or grandchild of the deceased, if the child or grandchild is entitled to the Disability Tax Credit (DTC).
Section 160.2(1) of the Income Tax Act provides that the beneficiary of an RRSP or RIF is “jointly and severally” liable with the estate of the deceased to pay the taxes owing as a result of the payment of the tax free proceeds of the RIF or RRSP. In this case, Sylvia wrote a cheque to Bruno in the amount of $135,000. Sylvia claimed that this amount was to settle the amount of tax that would be owing as a result of her receiving the $274,050.83. A payment of $38,980.97 was made by the estate, which left an unpaid balance in the deceased’s account of $57, 704.54. This was the amount the Canada Revenue Agency (CRA) was seeking from Ms. O’Callaghan.
The Tax Court judge in this case, Réal Favreau, rejected the arguments of the lawyer for Sylvia. At paragraph 28 in his judgement he said (emphasis added):
Concerning the appellant’s allegation that she was misguided by
the information provided on the CRA’s website, I would simply reiterate that such information is of a general nature only and should not be relied upon by taxpayers. Before writing a $135,000 cheque to her brother, the appellant should have sought professional advice to obtain confirmation that the issuance of the cheque was appropriate in the circumstances.
What Sylvia did after this judgement is not recorded. Did she sue brother Bruno? Did she appeal to the Federal Court of Appeal? Or, did she pay the $57,704.54 (plus seven years interest) and chalk the whole mess up to experience? An advisor would have told Sylvia to have Bruno obtain a Clearance Certificate; this may be obtained by filling out form TX9 Asking For A Clearance Certificate. Once the Clearance Certificate is obtained Sylvia would have proof that there was no money owing to the CRA.
For many taxpayers their Date of Death Tax Return is the most complicated they, or their survivors will have to deal with. It is so sad when a family member adds to the grief.
Melman is a case at the rarefied level of society that most of us will never experience. Before Tax Court Judge Randall S.Bocock, lawyers for Anthony Melman tried to prevent the imposition of penalties for gross negligence. They were not successful. Mr Melman is one of the pillars of the Canadian financial elite. Readers may have seen the media reports of this case. Once the judgement was handed down Melman was removed as head of the Audit Committee, and from the Board of Directors of CP Rail. This case is one that involved, literally, drive by tax return signing!
First, the background. In February 2007 two corporations owned by Melman sold their shares in Onex Corporation. They received $18,850,000 in taxable dividends. The dividends were then paid to Melman personally. In April of 2007 Melman invested $4,725,000 in a Guaranteed Investment Certificate that would mature in April of 2008 – just in time to pay the estimated taxes on these dividends. Melman and his privately held corporations had dealt with same accountants for many years.
In April of 2008 Melman’s accountants prepared tax returns for him and his corporations. They did not include the dividends in either his personal or corporate returns. They did not issue T3 or T5 slips and summaries from the corporations to Melman. As April of 2008 went on Melman became impatient to receive his tax returns; he had a trip scheduled.
Paragraph 21 of the judgement describes what happened on April 21, 2008 (emphasis added):
“Mr. Melman signed his tax return on April 21, 2008. He testified he did not review or read it in draft or final form. Although the attending junior accountant recalled little or nothing of the return or its execution during her testimony, Mr. Melman remembered executing the 2007 return at his house while the attending accountant waited for him to do so. During the execution, a taxi waited to return the accountant to her office. After returning with the executed return, it was filed by the accountants.”
As Justice Bocock relates, the drive by signing was so out of character for Melman. Melman, in every other year, would go line by line with his accountant over the tax returns. This suited Melman’s education and character; he has undergraduate degrees is business and finance, an MBA and a PhD in engineering and chemistry. The 2007 tax returns should have been so completely different – taxable dividends the previous year were less than $5,000 vs more than $18,000,000.
“Gross Negligence” is a penalty the CRA is applying with increasing frequency. Section 163(2) provides for a penalty of 50% of the tax owing, if at least $100 is owing. In plain English the penalty could be described as for being “willfully blind”. In Melman the taxpayer knew about the income, had set aside the $4,725,000 to pay the taxes, but he hadn’t bothered to read his tax return. Melman and his accountants are blaming each other; more business for the lawyers.
The lesson for us mere mortals: all the preparation is for naught if there is no examination to ensure the proper follow through.
Next month I’ll be looking at tax planning. As always, through my lens of Helping You to Keep More of YOUR Money.