Consent Order Not Rectification

The TCC decision in Estate of the Late John Arthur Murphy (released January 13, 2015) took tax practitioners by surprise. The court concluded that the decedent's RRSP was taxable in the estate and 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 and the deceased's adult children were designated as its 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 her 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 infirm child or grandchild.) The components of the RRSP income inclusion are unclear and the amount stated may contain a typographical error.

Despite that earlier agreement, on September 20, 2010 Ms. D applied to the Supreme Court of Nova Scotia and requested 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 for the children 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 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. Counsel for the estate argued that the consent order issued by the Nova Scotia Supreme Court "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...