In Picketts v. Hall Estate, 2007 BCSC 133, Mr. Justice Bauman varied the will of Coleman Ernest Hall to provide his common law spouse, Ms. Picketts, with $405,000 to renovate a condominium and $175,000 per year in monthly installments during her life. I wrote about the decision here.
The parties came back to court to determine a few issues arising from the judgment, the most interesting of which is whether the payments of $175,000 should be taxable in Ms. Picket’s hands, and tax deductible to the estate. Mr. Justice Bauman had characterized the payments as “an annual sum reflective of what she might have been awarded by way of spousal maintenance.”
Spousal maintenance is usually taxable to the receiving spouse and deductible to the paying spouse. But, the court considered Canada Revenue Agency’s Technical Interpretation 2003-083665, which says that support payments made by an estate the deceased’s spouse are not taxable to the receiving spouse or deductible by the estate. Mr. Justice Bauman followed the Technical Interpretation, and held that the support payments were not taxable to Ms. Picketts or deductible by the estate.
This decision is reported at 2007 BCSC 1278.
What if Canada Revenue Agency takes a different view ? I doubt that this judgment would be binding on Canada Revenue Agency. It was not a party. It seems to me that Canada Revenue Agency’s position might depend on how the executors characterized the payments. If the executors make the payments out of income earned by the estate, and the executors deduct the income paid to Ms. Pickets, she could be liable for tax. But, the executors would be acting contrary to the court’s decision, and Ms. Pickets would have a claim against the executors. Although this question is likely academic, it does illustrate the complexities income tax considerations bring to lawsuits about estates.