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Canada: Consent order not rectification

Tuesday, 17 March 2015   (0 Comments)
Posted by: Author: Sunita Doobay
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Author: Sunita Doobay (TaxChambers LLP, Toronto)

The TCC decision in Murphy Estate v. The Queen (2015 TCC 8) took tax practitioners by surprise. The court concluded that the decedent’s RRSP was taxable in the estate and was not rolled to the spouse, despite a consent order that transferred the RRSP to the spouse.

Mr. Murphy died intestate on February 15, 2009, holding substantial assets including a cottage, rental properties, and three RRSPs. Only one RRSP (with a $237,026 FMV) was the subject of the appeal. The deceased’s adult children were designated as the plan’s beneficiaries. The heirs fell into disagreement shortly after the death, but on April 30, 2010 the children and the spouse (Ms. D) agreed to a release of Ms. D’s claims against the cottage in return for the transfer to her of an RRSP valued at $160,000. The decedent’s terminal return, filed on April 30, 2010, included $256,829 of collapsed RRSP income. (Ordinarily, an RRSP that has not matured at the annuitant’s death is deemed to collapse unless its designated beneficiary is a spouse, or a financially dependent minor child or an infirm child or grandchild.) The components of the RRSP income inclusion are unclear, and the stated amount may contain a typographical error.

Despite that earlier agreement, on September 20, 2010 Ms. D applied to the Nova Scotia Supreme Court (NSSC) for an order for the division of matrimonial assets. A settlement of December 31, 2010 provided that the proceeds of two RRSPs were to be transferred to Ms. D’s RRSP and that the estate would pay to her any resulting refund of income taxes; the agreement specifically provided that the children were to sign any documents necessary to effect the RRSPs’ transfer on a tax-deferred basis. On May 13, 2011, the court issued the consent order, which was signed by Ms. D and the children. (The statement of facts and the consent order do not make it clear which RRSPs were included in the consent order.)

On August 10, 2011, a T1 adjustment to the terminal return was requested in order to reduce the decedent’s 2009 income by the $237,026 RRSP amount. (The facts do not disclose why an income reduction was sought for only one RRSP.) The minister refused the request. Counsel for the estate argued that the consent order issued by the NSSC "had an aspect of retroactivity . . . [and] confirmed that the RRSPs . . . vested in [Ms. D] from the date of Mr. Murphy’s death,” and furthermore relied on section 12 of the Nova Scotia Matrimonial Property Act and the FCA decision in Hillis ([1983] CTC 348). Section 12 allows a surviving spouse to apply to the court to have the matrimonial assets divided in equal shares, notwithstanding their ownership. The FCA in Hillis concluded that provincial legislation may be relied on to ascertain the rights of individuals to property and to ascertain when property vests in an individual. Counsel for the estate also relied on the FCA decision in Dale (97 DTC 5252)—still a leading authority on the issue—for the proposition that a retroactive superior court decision in a tax matter binds tax administrations.

In Dale, the minister unsuccessfully argued that the NSSC order might be binding between the taxpayers but was not binding on him. Robertson J, for the majority, rejected the minister’s position:

 The first principle is that the record of a superior court is to be treated as "absolute verity so long as it stands unreversed.” . . . Second, an order which has not been set aside must receive full effect according to its terms. . . . Third, the order is binding on all the world. . . . Fourth, a collateral attack is deemed to include proceedings other than those whose specific object is to effect a reversal or nullification of the order. . . .

The FCA quoted the SCC decision in Wilson ([1983] 2 SCR 594):

It has long been a fundamental rule that a court order, made by a court having jurisdiction to make it, stands and is binding and conclusive unless it is set aside on appeal or lawfully quashed . . . [and] may not be attacked collaterally . . . in proceedings other than those whose specific object is the reversal, variation, or nullification of the order or judgment.

The FCA also said,

As I understand it, the Minister’s position is that a court order which has the effect of rewriting fiscal history is not binding on him. . . .

It seems only logical that a court would decline the invitation to grant a retroactive order which has the clear legal effect of rewriting fiscal history. . . . One might be tempted to permit an attack on the ground of fiscal revisionism where it could be shown that the order was obtained by non-disclosure or misrepresentation. More likely than not revisionist orders will be obtained on consent, or in circumstances where it is likely that the tax ramifications of the order were not placed squarely before the judge, or where the judge was obviously sympathetic to the taxpayer’s situation. . . . In [two reported tax] cases it is obvious that there was no legal foundation, statutory or otherwise, for making the retroactive orders requested . . . [but those cases] are readily distinguishable from the case under appeal.

The TCC in Murphy agreed with the minister that the RRSPs vested in the decedent’s children upon his death and went on to say,

The Consent Order did not purport to change the beneficiaries to the RRSP in question. The Consent Order was not a rectification order nor was it intended to be a rectification order. It was an order in which the parties agreed to settle the Estate of John Arthur Murphy. The wording of the order makes it clear that Ms. [D] released all claims which she had to real and personal property held by the Appellant. In exchange, the Murphy Children released, conveyed and transferred their interests in the subject RRSP to Ms. [D].

At first blush, the TCC in Murphy does not appear to have taken into account the FCA decision in Dale. (See also the discussion of the doctrine of stare decisis in "Craig and Stare Decisis,” Canadian Tax Highlights, February 2012.) In Murphy, the Nova Scotia Matrimonial Property Act was clearly the statutory foundation for the order. However, a closer look at the consent order reveals that it failed to stipulate that Ms. D was to stand in the stead of the children as the designated beneficiary of the RRSP. The relevant provision of the consent order read as follows:

2. Forthwith upon the issuance of this Order, the Murphys agree to sign all required documents to release, convey and transfer to and in favour of the Applicant any and all interests that they may have in registered retirement savings plans of their father, John Arthur Murphy.

The TCC emphasized that the children never disclaimed the RRSPs, and it quoted the passage above from the consent order in support of that conclusion. The TCC said,

This wording suggests to me that the Murphy Children assigned [but did not disclaim] their interests in the RRSP. . . . [T]hey accepted the gift of the proceeds of the RRSP and then after negotiation and settlement, they consented to transfer all of their interests to Ms. [D].

The TCC’s conclusion seems correct: the consent order in essence transferred the RRSPs from the children to Ms. D and did not retroactively cause the RRSPs to pass directly from the decedent upon death to his spouse as a spousal rollover. However, arguably the TCC did not have jurisdiction to decide the effect of a decision of the NSSC under the Nova Scotia Matrimonial Property Act. If an appeal is filed with the FCA, it will be interesting to see that court’s reasoning.

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