When a person owes money to the tax authorities, it could be dangerous for them to try to subtract their major assets (e.g., a house, a car) from their personal patrimony by transferring them to a relative (e.g., their spouse, a child) in order to protect them from the tax authorities. This type of transaction is not without risk for the person receiving the assets.
Indeed, section 160 of the Income Tax Act1 ("I.T.A.") provides that when a tax debtor transfers property (e.g., cash or assets) in a non-arm's length transaction, the person receiving the property may be jointly and severally liable for the transferor's debt with the transferor, or even for interest payable. A similar regime exists in Quebec tax law2. At the federal level, the Minister will be free to assess the transferee at any time, since no prescription is applicable in such circumstances3. Ultimately, the person who received the property may be assessed for the lesser of the value of the property received and the tax debtor's debt.
That being said, it's all about timing! Thus, a taxpayer who received property from his spouse, who would have had no debt to the tax authorities at that time, should not be accused of having received such property if, several years later, his spouse is subject to assessments from the Canada Revenue Agency or Revenu Québec.
For example, in the recent case of Colitto v. The Queen4, the Tax Court of Canada was required to rule on assessments that had been issued pursuant to section 160 I.T.A.
In this case, the assessed taxpayer had received half of two properties with a total value of approximately $230,000 for the modest amount of $4 in May 2008. The property had been transferred to her by his spouse who was a director of a corporation. It appears that the corporation in question had failed to remit its source deductions ("SD") to the Minister for the period February to August 2008. Almost two years after receiving half of the properties, in March 2011, the taxpayer's spouse was assessed for the corporation's unpaid SD under subsection 227.1(1) I.T.A. The general rule regarding the procedure prior to holding a director liable requires that a certificate for the amount of the corporation's liability be registered in the Federal Court (which took place in August 2009 in Colitto) and execution for that amount has been returned unsatisfied in whole of in part (in January 2011 according to the facts).
Ultimately, the Colitto decision states that a director's liability (for a corporation's SD) cannot be engaged under subsection 227.1(1) I.T.A. until the preconditions for doing so have been met. Essentially, the Minister must still comply with the dual requirement of registering a certificate with the Federal Court for the amount of the corporation's liability and be in the presence of a total or partial failure of the execution for that amount, before the director of a corporation can be assessed for the corporation's tax liability (as a general rule)5. Thus, the Court decided that the spouse's liability for the corporate tax debt had been crystallized in January 2011 and not in 2008, the year of the real estate transfer and of the corporation's failure to pay SD. The taxpayer won, and the assessments were vacated.
Ultimately, this decision reflects the importance of a tax debt being duly established for the transferor before the tax authorities can attack the transferee. In any case, for taxpayers feeling the heat, it may be appropriate to consult a professional before transferring assets to a relative.
Note: the author would like to thank Avi Moryoussef, student, for his precious help.
Footnotes
1 Income Tax Act, R.S.C. (1985), c. 1 (5th Supp.) ("I.T.A.").
2 See section 14.4 of the Tax Administration Act, R.S.Q., c. A-6.002 and section 1034 of the Taxation Act, C.Q.L.R., c. I-3.
3 See subsection 160(2) I.T.A.
4 Colitto v. The Queen, 2019 TCC 88.
5 See paragraph 227.1(2)(a) I.T.A.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
