April 19, 2024
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Section 160 of the Income Tax Act (and section 325 of the Excise Tax Act) allow the CRA to assess a taxpayer to collect a tax debt owing by another taxpayer, in certain circumstances. In particular, this can happen whenever there is a transfer of property by a tax debtor to a relative or other person with whom the tax debtor does not deal at arm’s length (the “Transferee”) for less than fair market value ("FMV") consideration. This provision applies if the transfer is made in the same year the tax debt relates to, or a subsequent year. It even applies if the tax is assessed for the year, after the property is transferred. A simple transfer of a husband's interest in the family home to his wife can expose the wife to the husband's tax debt, if he had such debt as of the year when the transfer occurred. Because of the transfer, the CRA can seize any of the wife’s assets (not just the family home) up to the value of the interest in the house to collect the debt. This type of transfer usually leaves the couple worse off than if the husband had done nothing. A section 160 assessment is reduced to the extent the Transferee provides consideration for the property received (including by reducing a debt that the tax debtor owed the Transferee). For example, in the above case, if the wife assumed the husband's share of the mortgage on the house, the CRA would have to reduce the amount it can collect from the wife by the amount of the assumed mortgage. If the wife also used her funds to pay for her husband's specific expenses, such as the lease on his car, these payments may reduce the CRA can collect from the wife. Though CRA often will not accept this argument and an appeal to the Tax Court may be required. Each such case depends on its own facts and on the extent to which the Court believes that the wife’s payments were intended to create a debt owing to her by the husband, or were payment for the property he transferred to her. Payments for joint or household expenses generally do not reduce what the CRA can collect. These assessments often come as a nasty shock to a spouse or children who received gifts from their spouse or parent since, in most cases the recipient isn't aware that a tax debt was owed. The Transferee can be assessed even if he or she had no knowledge of the transferor's tax debt. That wedding gift from a parent — or even the parent’s paying for the wedding — could be ruined by a CRA assessment against the child if the parent owed taxes at the time and cannot pay the CRA. Think you are helping a relative by cashing a cheque? Think again. In one recent case, a mother allowed her tax debtor son to deposit his paycheques to her bank account (using her bank card), and to simultaneously withdraw the same amount in cash. Despite the fact that the son withdrew the cash, the mother was liable for 100% of his deposits! TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. |