An Alberta widow, Marlene Enns, has triumphed in a pivotal court case against the Canada Revenue Agency (CRA), securing the right to keep the retirement savings left to her by her late husband. This ruling sheds light on a contentious clause in Canadian tax law that allows the CRA to collect unpaid tax debts from spouses or common-law partners in specific cases.
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The Court Ruling: Defining ‘Spouse’ in Tax Law
The Federal Court of Appeal ruled that Marlene Enns is exempt from Section 160 of the Income Tax Act. This section permits the CRA to hold individuals accountable for another person’s tax debts under certain conditions.
The court clarified that under the law, a marriage ends upon the death of a partner. Therefore, Marlene was no longer considered a “spouse” at the time she inherited her husband’s Registered Retirement Savings Plan (RRSP).
The judge emphasized:
“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.'”
This decision resolves years of uncertainty, as previous Tax Court cases involving widows resulted in conflicting interpretations of the term “spouse.”
Background of the Case
Marlene Enns’s husband, Peter, passed away in 2013, leaving her as the sole beneficiary of his RRSP, valued at $102,789. The funds were transferred to Marlene’s locked-in account following his death.
Four years later, the CRA assessed Peter’s estate and found he owed nearly $150,000 in income taxes. The CRA invoked Section 160 to recover the amount from Marlene, claiming she was Peter’s spouse and therefore liable for his tax debt.
Section 160 is a tool designed to prevent individuals from transferring assets to close family or friends at below market value to avoid paying taxes. However, this clause can unintentionally burden family members with another person’s tax liabilities.
Court Battles and Legal Precedents
In 2023, the Tax Court of Canada ruled against Marlene, asserting she was still considered Peter’s spouse under the clause. However, the Federal Court of Appeal overturned this decision, stating that a spouse ceases to exist legally upon the death of a partner.
This clarification ensures that widows and widowers are no longer at risk of being held accountable for the tax debts of their deceased spouses under Section 160.
Implications for Taxpayers
Tax lawyer Lori Bokenfohr noted the significance of this ruling:
“It’s good news for spouses of deceased people who owe taxes, for the taxpayer community, and for Canadians.”
The ruling protects family members from unintended consequences when inheriting property or savings. Without this clarification, surviving spouses could face severe financial hardships due to tax liabilities they did not incur.
Chad Brown, Marlene’s lawyer, highlighted the broader issue:
“This approach has inequitable consequences. Not only does the CRA collect the funds from the deferred plan, but the surviving spouse is also taxed on the withdrawal of those funds, leaving them worse off overall.”
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Key Takeaways
- Widows Are Exempt from Section 160: The court ruling confirms that widows and widowers are not considered “spouses” under the Income Tax Act after their partner’s death.
- Clarity on CRA Powers: The CRA cannot use Section 160 to collect unpaid tax debts from widows or widowers who inherit property or savings.
- Protections for Inherited RRSPs: This decision reinforces protections around RRSPs, ensuring surviving spouses are not doubly taxed.
Conclusion
The Federal Court of Appeal’s decision in Marlene Enns’s case marks a significant victory for taxpayers, particularly widows and widowers. By defining the term “spouse” more clearly, the ruling prevents the CRA from unfairly targeting surviving family members for tax debts they did not create.
This case underscores the importance of understanding your rights and seeking legal advice when navigating complex tax issues. Canadians can now breathe easier knowing this legal ambiguity has been resolved.
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