In a recent decision of the Tax Court of Canada (the "TCC"), Colitto v. Her Majesty the Queen, 2019 TCC 88 [Colitto], the TCC had the opportunity to consider a situation involving a cascading assessment involving a husband and wife under section 160 of the Income Tax Act, RSC 1985, c 1 (5th Supp) [Act]. The section 160 assessment against Ms. Colitto was based on her husband's director's liability assessment under section 227.1 for unpaid source deductions by a corporation in which the husband was a director and shareholder. The decision is important for at least three reasons. First, it overrides a line of case authority and confirms that liability under the director's liability provisions of the Act only arises when the relevant preconditions under subsection 227.1(2) of the Act are satisfied. Second, Colitto confirms that once liability under subsection 227.1 is crystalized, it is not retroactive to the time of the underlying failure to remit by the corporate taxpayer. Third, the decision confirms that liability under section 227.1 of the Act is not dependent on intent, or lack of intent, to defeat the Minister of National Revenue's (the "Minister") collection efforts under subsection by 227.1 by transferring assets. Accordingly, Colitto provides a new defence and a potential measure of relief to taxpayers facing the draconian and harsh application of these two provisions of the Act.
The Act contemplates certain circumstances wherein the Minister can collect an amount owed by one taxpayer from another person. Section 160 of the Act permits the Minister to collect taxes owing by an individual transferor with unpaid tax liability from a non-arm's length transferee who has received money or other property for no consideration or consideration of less value. Similarly, by virtue of section 227.1 of the Act, the Minister may collect taxes from a director owing by a corporation due to the corporation's failure to remit source deductions. The cascading derivative assessment in Colitto required the TCC to re-examine the operation and interplay between these two important provisions of the Act.
Throughout the period of February 2008 to August 2008, Precision Technologies Ltd. ("Precision"), a corporation of which Mr. Colitto acted as a director, failed to remit source deductions. In May of 2008, Mr. Colitto transferred an interest in two real properties (collectively, the "Properties") to his wife, Mrs. Colitto, for nominal consideration. On October 10, 2008, the Canada Revenue Agency (the "CRA") issued an assessment to Precision for failure to remit and Precision's tax debt was ultimately registered via a certificate in Federal Court on August 6, 2009. More than a year later, on November 23, 2010, the sheriff was issued a direction to enforce the writ which was returned unsatisfied thereafter on January 4, 2011. The Minister officially issued a section 227.1 assessment to Mr. Colitto finding him liable, as a director, for Precision's failure to remit on March 28, 2011. Finally, on January 13, 2016, the Minister issued an assessment pursuant to section 160 of the Act to Ms. Colitto. Ms. Colitto appealed this assessment to the TCC.
The issue to be determined in Colitto was the timing of Mr. Colitto's liability under section 227.1 of the Act for Precision's failure to remit source deductions from February to August of 2008 and how that timing related to Ms. Colitto's liability under section 160 of the Act in respect of the May 2, 2008 transfer of the Properties. To determine this, Justice Visser of the TCC undertook "a textual, contextual and purposive" analysis of subsection 160(1), specifically paragraph 160(1)(e)(ii) and section 227.1 of the Act, and examined how each of them interact with each other. Although a handful of decisions have moved through the TCC which deal with both sections 160 and 227.1, none of them had conducted an in-depth analysis such as that conducted by Visser J. in Colitto.
The typical starting point for a subsection 160(1) analysis is the decision of Livingston v. R, 2008 FCA 89 [Livingston]. However, as the TCC discussed in Colitto, the analysis conducted in Livingston only dealt with whether a transfer had occurred and any analysis which dealt with the timing of a transferor’s liability was not in issue. As such, Livingston could be distinguished from the facts in Colitto in that Livingston did not specifically consider the issue of cascading assessments under the combined operation of sections 160 and 227.1 of the Act nor the question of when a transfer occurred.
Further, Visser J. noted that the Appellant's strict interpretation of the language in Livingston that "the transferor must be liable to pay tax under the Act at the time of the transfer" reflected the pre-amended version of subsection 160(1) dating back to prior to November 12, 1981. That former provision had been concerned with a transferor's tax liability on the day of the transfer. Visser J. noted that Parliament subsequently amended this subsection to extend liability to include amounts payable by the transferor under the Act for the year in which the property was transferred.
In this regard, Visser J. determined that it was more appropriate to apply Raphael v. R., 2000 DTC 2434 [Raphael] to circumstances wherein sections 160 and 227.1 of the Act are at play. Raphael held that the one of the requirements for subsection 160(1) of the Act to apply is that the "transferor must be liable to pay an amount under the Act in or in respect of the year in which the property was transferred or any preceding year".
Visser J. found this wording to be more consistent with the statutory language of subparagraph 160(1)(e)(ii) of the Act when compared to the requirement set out in Livingston. Specifically, Visser J. held that the wording of the Act and Raphael required the TCC to determine whether Mr. Colitto, the transferor, was liable to pay an amount under the Act "in or in respect of the year in which" the Properties were transferred to Mrs. Colitto.
The TCC then had to determine exactly which taxation year Mr. Colitto became liable to pay an amount under the Act. The Minister argued that subsection 160(1) of the Act is concerned with Precision’s taxation year and therefore Mr. Colitto was liable in 2008, the year in which Precision had failed to remit source deductions. However, after conducting a "textual, contextual and purposive" analysis of 160(1)(e)(ii) of the Act, the TCC held that because subsection 160(1) describes a transferor and a transferee of property, and because there are multiple transferors and transferees in cascading derivative assessments, this interpretation was not correct. In the circumstances, Precision was not the transferor of the Properties. Rather, the germane "transferor" was Mr. Colitto and the relevant taxation year contemplated by paragraph 160(1)(e)(ii) was the year during which the Properties were transferred, namely, Mr. Colitto's 2008 taxation year.
The question left for the TCC to answer was whether in 2008, when the Properties were transferred to Mrs. Colitto, Mr. Colitto was liable to pay an amount under section 227.1 of the Act. If Mr. Colitto's liability arose in his 2008 taxation year, as the Minister suggested, the transfer would fall under subsection 160(1) of the Act, whereas if the 227.1 liability arose in 2011 and was further determined not to have arisen "in respect of" Mr. Colitto's 2008 taxation year, Mrs. Colitto would not be exposed to any subsection 160(1) liability.
To answer this question, Visser J. turned his textual, contextual and purposive analysis towards section 227.1. Although past decisions have held that director's liability under section 227.1 arises in the year in which the corporation failed to remit source deductions (White v. R, 95 DTC 877, Filippazzo v. R, 2000 DTC 2326, Pliskow v. R, 2013 TCC 283, and Sheck v. The Queen (2018), 2018 TCC 125), the TCC in Colitto determined that this body of case law did not engage in a textual, contextual and purposive interpretation of how sections 160 and 227.1 of the Act should interact with each other.
Visser J. went on to determine that a director's liability under section 227.1 was not intended to be absolute and has been limited by the language set out in subsection 227.1(2) which states that a "director is not liable under subsection (1), unless" certain conditions are satisfied. The conditions found within subsection 227.1(2), namely that the Minister:
- must have exhausted all collection remedies against the corporation; and
- register a certificate with the Federal Court for the corporation’s outstanding liability before such liability can be imposed on its directors;
were determined by the TCC in Colitto to be preconditions for liability rather than some form of limitation period wherein a Minister cannot assess liability until they have been fulfilled.
Further, since these preconditions must be met before a director's liability assessment is crystalized, the TCC held that there is no reason in common law or the wording of section 227.1 to retroactively impose this liability to the date a corporation fails to remit source deductions. In this regard, Visser J. found that to treat a director's liability as absolute and manifesting from the taxation year wherein a corporation fails to properly remit source deductions was not the intention of Parliament and would lead to an extraordinary remedy when applied in conjunction with subsection 160(1):
The interplay of these provisions demonstrates that Parliament never intended that a director's liability under section 227.1 of the Act for a corporation's failure should be viewed as absolute the moment that the corporation failed to meet its remittance obligations. In my view, to be able to trace a corporation's liability to its director under section 227.1 and then ultimately to the director's spouse under section 160 is an extraordinary remedy, and one that should only be applied if expressly permitted by law.
As such, the TCC declined to follow previous case authority which held that director's liability arises from the time of the corporation's failure to remit. Ultimately the court in Colitto held that such a liability is more appropriately crystalized once all statutory preconditions found in section 227.1 had been met.
In addition to the above-noted analysis, the TCC turned its attention to the matter of intention under section 227.1. In this regard, the TCC held that knowledge of the underlying corporate failure is not a precondition to liability under section 227.1, and that a corporate director could rely on the two year limitation period in subsection 227.1(4) whether or not the director resigns with intent to defeat the Minister's collection attempts pursuant to s. 227.1 As such, liability under section 227.1 is not dependent on intent (acknowledged or inferred), or lack of intent, to defeat the Minister's collection under subsection by 227.1 by transferring assets and should not be a factor in interpreting the meaning of section 227.1.
Therefore, although Precision's tax liability for failure to remit source deductions arose in 2008, the same year in which Mr. Colitto transferred the Properties to Mrs. Colitto, Mr. Colitto's tax liability as a director of Precision under section 227.1 of the Act only arose in 2011, when the Minister filed a certificate with the Federal Court and such liability did not arise retroactively in 2008.
Colitto is an important decision for corporate directors and non-arm's length recipients of property from those directors. The case provides a detailed interpretation of the preconditions to the operation of section 227.1 and its interplay with section 160 of the Act in the context of cascading assessments involving unremitted corporate source deductions. The timing associated with the Minister's satisfaction of those pre-conditions is important in determining liability. In addition, Colitto confirms that once liability under subsection 227.1 is crystalized, that liability it is not retroactive to the time of the underlying failure to remit by the corporate taxpayer. Finally, Colitto holds that intention is not material to the determination of liability under section 227.1. In this regard, Colitto provides a new defence and a potential measure of relief to taxpayers facing the draconian and harsh application of these two provisions of the Act.
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