- within Tax topic(s)
- with Senior Company Executives, HR and Finance and Tax Executives
- in United States
- with readers working within the Accounting & Consultancy and Property industries
s.160 holds the transferor and transferee jointly and severally liable for transfers of property
During the 2002 to 2004 taxation years, the taxpayer, Mr. Panneton's spouse, caused payments totalling $141,109.38 to be made to third parties through two corporations of which he was the sole shareholder (the "Corporations"). The payments were made in respect of work performed on a residence wholly owned by the taxpayer. The fair market value of the consideration provided by the taxpayer in exchange for these amounts was $9,800.
In or around 2009, the CRA audited the taxpayer's spouse for the 2002 to 2007 taxation years. As a result of the CRA audit, the income tax assessment of him used the net worth audit method and determined a tax liability exceeding $141,109.38, and subsequently assessed the taxpayer under s.160 of the Income Tax Act. The taxpayer's spouse declared bankruptcy in 2012.
The issue before the Court was whether the CRA was correct in assessing the taxpayer under s.160 of the Income Tax Act in the amount of $131,309.38. The taxpayer argued, among other things, that (i) there was no direct or indirect transfer of property from her spouse to her, as the payments were made by the Corporations from their own funds, and not by her spouse personally; and (ii) the payments related to leasehold improvements made to the basement of the residence for the benefit of the Corporations, which carried on their business activities there.
Issues to be decided
The parties advised that the sole issue for determination was whether the taxpayer transferred, "either directly or indirectly, by means of a trust or by any other means whatever," the amount of $141,109.38 to his spouse within the meaning of subsection 160(1) of the Income Tax Act.
The Tax Court clarified the case law principle on s.160 of the Income Tax Act
The Court began by outlining the governing principles for interpreting s.160(1) of the Income Tax Act, emphasizing the Supreme Court of Canada's textual, contextual, and purposive approach from Canada Trustco. Given the technical nature of the Act, courts place particular weight on the text to ensure predictability and fairness.
The established purpose of s.160(1), as confirmed in cases such as Livingston, Medland, and Eyeball Networks, is to protect the tax authorities by preventing tax debtors from frustrating collection efforts through transfers of property to non-arm's length persons for less than fair market value.
Case law consistently holds that s.160(1) must be interpreted broadly and liberally. The statutory language – "either directly or indirectly, by means of a trust or by any other means whatever"—demonstrates Parliament's intention to capture a wide range of transactions.
Importantly, neither the English nor French versions of the provision requires that the exact same property owned by the tax debtor be received by the transferee. Courts, therefore, focus on substance rather than form.
Drawing on decisions such as Fasken Estate, Kieboom, Medland, Strachan, and Damis Properties, the Court reaffirmed that a "transfer" occurs whenever there is a reasonable connection between a reduction in the tax debtor's patrimony and a corresponding increase in the recipient's patrimony, regardless of whether the transfer is accomplished through corporate intermediaries or other circuitous means.
It is unnecessary to trace identical property; instead, the inquiry is whether value has moved from the debtor to the non-arm's length person.
The Tax Court found there was transfer of property between the taxpayer and his spouse
Applying these principles, the Tax Court noted that it was undisputed that two corporations (GAM and PAM) controlled by the taxpayer issued cheques totalling $141,109.38 to third parties between 2002 and 2004.
It was also undisputed that these payments were made for work performed on a residence wholly owned by the taxpayer's spouse, and therefore for her benefit. Consistent with Medland and Goldberg, the parties agreed that property in that amount was transferred to the taxpayer's spouse; the remaining question was whether the transfer was from the taxpayer within the meaning of s.160(1) of the Income Tax Act.
The Tax Court rejected the taxpayer's claim that the payments related to leasehold improvements benefited the corporations. The court found this argument lacked credibility, was raised late, and was unsupported by documentary evidence, corporate financial statements, or tax filings. The evidence instead showed that major renovations were undertaken for the taxpayer's spouse's benefit.
Given that GAM and PAM received no consideration, and since the taxpayer was the sole shareholder during the relevant period, the value of his shares necessarily declined by an equivalent amount. The court also drew an adverse inference from the taxpayer's spouse's absence at the hearing and found that the corporate separateness argument did not preclude the application of s.160(1) of the Income Tax Act.
Pro tax tips – s.160 holds the transferor and transferee jointly and severally liable
In this case, the Court concluded that there was a clear connection between the reduction in the taxpayer's corporate assets and the increase in his spouse's patrimony.
After all, s.160 of the Income Tax Act is a powerful, "strict liability" tax collection tool used by the CRA to hold a third party responsible for a tax debtor's outstanding tax debt, and both transferee and transferor become jointly and severally liable for the transferor's tax debt, up to the undervalued portion of the property.
Therefore, when a taxpayer owes a tax debt and intends transfer property to a third-party, it is highly recommended that taxpayers consult with an experienced Canadian tax lawyer to avoid certain unintended consequences due to s.160.
FAQ:
What is the legal consequence of s.160 of the Income Tax Act?
Section 160 of the Income Tax Act (Canada) applies when a taxpayer with outstanding tax debts transfers property (cash, real estate, shares, etc.) to a non-arm's length person—such as a spouse, common-law partner, minor child, or related corporation—for less than fair market value. The recipient becomes jointly and severally liable for the tax debt, up to the difference between the property's fair market value and the consideration given.
How do taxpayers defend themselves against the application of s.160 of the Income Tax Act?
S.160 is a strict liability provision that means once the conditions are met, both the transferor and transferee will be jointly and severally liable. Therefore, the only defence would be to challenge the conditions to lead to the application of s.160:
- Fair Market Value (FMV) Consideration: Demonstrate that the recipient paid FMV for the property at the time of transfer.
- Arm's Length Transaction: Prove the transfer was made between parties dealing at arm's length (rare, as s.160 applies to non-arm's length).
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.
