The Tax Court of Canada very recently decided a case regarding section 160 of the Income Tax Act in Muir v Queen 2020 TCC 8. Section 160 of the Income Tax Act allows the Canada Revenue Agency to pursue tax liability against a taxpayer who receives something of value from someone with tax liabilities at the time of transfer. This means that if you receive a gift from someone while they had a tax debt, the CRA can hold you personally liable for the debt and attempt to collect from you.
This gift can be anything of value that was transferred to the transferee by the transferrer at less than fair market value. Section 160 transfer can take place directly or indirectly to either a spouse or common-law partner, an individual under 18 years of age or anyone else who was not dealing at arm's length. The rationale behind this is that taxpayers shouldn't be able to escape from paying their tax debts by transferring value to a family member or a non-arm's length party.
When a transferee is assessed under Section 160 of the Income Tax Act, they are liable to pay the lesser of (1) the transferor's tax debt at the time of the transfer and (2) the net value of the property the transferee received from the transferor.
Unlike other provisions in the Income Tax Act, a section 160 assessment does not contain statutory time limit, nor will bankruptcy of the original taxpayer cancel the assessments. Additionally, the fact that the third party had no knowledge of the original tax debt will not be considered a defense. In simple terms, three general defences can be argued against a section 160 assessment.
- The taxes were not actually owed.
- The transfer was not a gift
- The transfer was not as valuable as the CRA alleges.
It should also be noted that Section 160 applies to transfers from corporations as well and has a parallel provision in Section 325 of the Excise Tax Act for GST/HST.
The Case of Muir v Queen
In the case of Muir v Queen, a professional corporation facing financial difficulties had to sell off all of its assets for an estimated value of $1.2 million. Most of this amount was used to pay off its corporate liabilities at closing, however, $124,000 of it was transferred to one of its shareholders, Ms. Muir.
The understanding was that the shareholder would use the amount to pay off the remaining creditors, namely clients of the corporation, who would have been difficult to deal with on closing. More specifically, the amount was used to return the trust accounts of orthodontic patients and in the end, the entirety of the $124,000 transferred to the shareholder was spent doing just that. The following year, the corporation was reassessed by the CRA along with the shareholder under section 160 of the Act.
In the case at hand, Justice Boyle reiterated that while the purpose of section 160 was to preserve the value of the assets for collection it does not apply where something of equivalent value was given into consideration. Such a transaction does not negatively affect the original taxpayer from paying his tax debts and therefore does not prejudice the CRA as a creditor. In the case of Muir, the $124,000 that was paid to the shareholder in exchange for her taking on the discharge of the corporation's remaining debt. Even if the arrangement was never formalized by contract, there was still an equivalent consideration in return for the $124,000. Therefore, the transfer was not a gift and the CRA could not trace the tax liability from the corporation to the shareholder. As a result, the section 160 assessment was vacated.
Tax Tip: Plan your Affairs Carefully When Transferring Valuable Property to a Non-Arm's Length Party
It's all too common for a taxpayer with significant personal tax liability to the CRA to transfer money or an expensive gift to a spouse or a loved one without considering the tax implications of the transfer. Sometimes, the tax liability might not have even existed at the time of transfer and the CRA ends up reassessing the taxpayer years later.
If you plan on or have already transferred assets to someone who was not at "arm's length" or you believe you might be someone to which section 160 applies, then you should seek professional advice from a Canadian tax lawyer to plan your affairs appropriately.
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.