Being a bigamist is a criminal offence, but it's OK under tax law

National Post


Bigamy is illegal in Canada and is considered a criminal offence, but it’s possible to be a fiscal bigamist under our tax law. This can happen if you have both a spouse, someone to whom you are legally married, and a common-law partner, someone you cohabit with in a conjugal relationship and have done so for a continuous period of at least one year.

One of the biggest tax advantages of being married or in a common-law relationship occurs when one partner passes away. The Income Tax Act allows all of that partner’s property to be “rolled over” to the surviving spouse or partner on a tax-deferred basis. This includes all non-registered investments, such as stocks, bonds and mutual funds, but also registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs).

By leaving all your assets to a spouse or partner upon death, you can avoid paying current capital gains tax on the deemed disposition of your assets at fair market value as of the date of death. In addition, you can defer taxes on the fair market value income inclusion of your RRSP or RRIF, which, absent a rollover, would be fully taxable as income on your final tax return.

The fact that an individual can have more than one spouse or partner for tax purposes has been confirmed by the Canada Revenue Agency multiple times over the years. For example, more than a decade ago, the CRA was asked by a taxpayer who was legally separated from his wife and living in a common-law relationship with a different woman about how the RRIF rollover rules would operate upon his death. Each woman was individually listed as a beneficiary on the taxpayer’s two separate RRIFs. The CRA confirmed that, upon the taxpayer’s death, each woman would qualify for the tax-deferred rollover treatment.

In the United States, the issue of multiple marriages and a nullified divorce recently came up in an estate tax case before the U.S. Tax Court. Semone and Hilda Grossman were married in New York City in 1955, had two children and separated in 1965. In 1967, Semone travelled to Mexico and unilaterally obtained a divorce from Hilda, which was granted by a Mexican court. After divorcing, Semone married his second wife in a civil marriage ceremony in New Jersey and had two more children. In 1974, this relationship, too, ended, and Hilda filed suit seeking a judgment that the Mexican divorce was null and void and that she remained Semone’s lawful wife. The court ultimately found in Hilda’s favour.

Fast forward to 1986, and Semone became engaged to his third wife. They decided to get married in Israel, but, first, Semone needed a “get” — a Jewish religious divorce — from Hilda. Before the wedding, Semone and Hilda appeared before an orthodox rabbinical court in New York and obtained the get. Semone was then able to present evidence of this religious divorce to Israeli authorities and he married his third wife, in Israel, in 1987.

After the marriage ceremony, the couple returned to New York and continued to live there until Semone’s death in 2014. They had two children together, filed joint federal U.S. income tax returns, and shared a home and finances. During this time, Hilda also lived in New York and saw Semone and his third wife socially, and never challenged their marriage. Hilda filed federal income tax returns as single and never made any claims against Semone’s estate after he died, which is when the Internal Revenue Service got involved.

Semone, a Holocaust survivor who was interned in a series of concentration camps during the war, emigrated in 1949 to the U.S., where he became a parking garage magnate who operated 40 garages in three New York City boroughs. He died with a large estate that was worth, at the time of his death, approximately US$87 million. The bulk of the estate (approximately US$79 million) was bequeathed to his third wife.

The U.S., unlike Canada, has an estate tax that applies to the value of assets upon death, at graduated rates that start at 18 per cent and currently range up to 40 per cent. There is, however, an unlimited marital deduction from the value of the estate subject to estate tax, which is available for estate assets left to a surviving U.S. citizen spouse upon death.

In March 2017, the IRS sent the estate a “notice of deficiency” that showed estate tax owing of US$35 million, along with an accuracy-related penalty of US$7 million. This assessment was based on the IRS’s belief that Semone and his third wife were not legally married to each other for federal estate tax purposes and, therefore, his third wife did not qualify as his surviving spouse for the purpose of claiming the marital deduction.

The IRS argued that their marriage was contrary to public policy because it was bigamous, since Semone’s religious divorce from Hilda was invalid under New York law and was insufficient to dissolve the first marriage. Since the couple weren’t validly divorced, the IRS argued that any subsequent marriage by Semone would be bigamous.

The estate disagreed, maintaining that his third wife was, indeed, Semone’s surviving spouse for estate tax purposes because New York applied a “place of celebration” rule, and there was no dispute that the marriage was valid in Israel, the place of celebration.

The judge agreed, noting that the question of whether New York residents who celebrate marriages outside the state should be considered to be legally married in New York is not a new one. It can be traced as far back as 1881, when the New York Court of Appeals recognized the “general rule of law that a contract entered into in another state or country, if valid according to the law of that place, is valid everywhere … the rule recognizes as valid a marriage considered valid in the place where celebrated.”

The main exception to this rule, however, is in the case of bigamy. But since there was no dispute that Israel viewed Semone and Hilda as validly divorced and Semone was legally able to remarry under its laws, the Tax Court concluded that “New York would respect (their) marriage.”

The Tax Court found in favour of the estate, allowing the full marital deduction for estate tax purposes.