If you owe taxes to the Canada Revenue Agency (“CRA”) and you transfer property to your spouse or other non-arms length person for less than fair market value, then the CRA can come after him or her, and you, for your tax debt.
Section 160 of the Income Tax Act is a collection tool that permits the CRA to go after your spouse and other family members who have received property for less than fair market value. It can include gifts, RRSP proceeds, paying for your daughter’s wedding, shareholder dividends, or distributions on death of the tax debtor. This is not an exhaustive list.
The following criteria must be met for section 160 to apply:
1. There must be a transfer of property, either directly or indirectly.
2. The transferee must have been either the transferor’s spouse or common law partner, a minor, or a person with whom the transferor was not dealing at arm’s length.
3. The transfer must have taken place at a time when the transferor had a tax debt.
5. The transfer must have been for less than fair market value of the property.
If these criteria are met then the person you transferred the property to is jointly and severally liable with you for the lesser of the amount of your tax debt or the difference between how much the fair market value exceeds the consideration that your spouse or other non-arms length paid for the property.
Now the CRA has two people they can go after rather than just you. Why would you want to help out the CRA like that, and why would you want to burden your spouse or other family member with your tax debt?
There is no time limit for the CRA to assess someone under section 160 so it can potentially hang around until they die and then form a debt to the estate.
There is an equivalent provision dealing with GST /HST tax debts under section 325 of the Excise Tax Act.
So what do you do if you get assessed under section 160 of the ITA (or 325 of the ETA)? Well there are very limited defences but there are a few. There is a time limit for objecting to an assessment so you better call Saul (or Norm) as soon as you receive it so he can preserve your rights and launch an appeal.