Can you become responsible for someone else’s tax debt, even if you never owed the taxes yourself? The short answer is yes.

The Canada Revenue Agency (“CRA”) has powerful tools that allow it to recover certain tax debts from people other than the taxpayer who originally incurred the debt. One of these tools is section 160(1) of the Income Tax Act (“ITA”).

Section 160(1) is intended to prevent a person with tax liabilities from transferring property to certain related or non-arm’s length persons for less than fair market value in circumstances where the transfer could frustrate the collection of those taxes. ^[1]

Meeting the Requirements Under Section 160(1) of the Income Tax Act

For the CRA to successfully issue a Section 160 assessment, courts have required that the transaction must satisfy four legal requirements: ^[2]

1. The Transferor Has a Tax Liability
   • The transferor (the owner of the property) must have a tax liability at the time of the transfer.
   • This tax liability does not necessarily have to have been assessed before the transfer takes place.

2. There Was a Transfer of Property
   • There must have been a transfer of property from the tax debtor to another person. This includes transfers made directly or indirectly, including through a trust or other means.

3. The Transfer Was Made to a Person Covered by Section 160(1)
   • The transferee (the recipient of the property) must fall within one of the categories identified in section 160(1). These include:
     1. The transferor’s spouse or common-law partner (or a person who has since become the transferor’s spouse or common-law partner);
     2. A person who was under 18 years of age; or
     3. Another person with whom the transferor was not dealing at arm’s length.

4. The Property Was Transferred for Less Than Fair Market Value

• • The final requirement is that the transferor received less than the fair market value of the property in consideration for the transfer.
  • The amount for which the transferee may be liable is generally tied to the difference between the fair market value of the property and the consideration given. ^[3]

Understanding each requirement is important because section 160(1) does not automatically apply simply because one person owes taxes and has transferred property to another person.

The Impact of a Section 160 Assessment

When the four above requirements are met and section 160 is found to apply, the transferor and the recipient both become “jointly and severally” liable for the transferor’s tax debt up to the undervalued portion of the property. Importantly, this can apply regardless of whether the recipient was aware of the transferor’s tax debt or whether the transfer was made with any intent to avoid payment of the tax debt.

Section 160 liability can also survive the transferor’s bankruptcy. Even if the original tax debtor is later discharged from bankruptcy and thereby released from the underlying tax debt, the transferee can remain liable to the CRA until the tax debt is fully repaid. ^[4]

How to Challenge a Section 160 Assessment

To challenge a notice of assessment under section 160 of the Income Tax Act, you must file a notice of objection within 90 days from the date on the assessment. If you fail to meet the 90-day deadline, you might qualify for an extension, but you must apply for the extension within one year and 90 days from the date on the assessment or confirmation.

Takeaway

Section 160(1) of the Income Tax Act gives the CRA significant powers to pursue tax debts from parties other than the taxpayer who originally incurred them. For individuals receiving property from a spouse, family member, or other non-arm’s-length party, the potential tax consequences should not be overlooked. What may appear to be an ordinary transfer of property can result in significant liability if the transferor has outstanding tax obligations.

If the CRA issues a section 160 assessment, understanding the statutory requirements, the amount assessed, and the applicable objection deadlines is critical to determining whether the assessment can be successfully challenged.

If you have questions about whether you owe taxes or other matters involving the CRA, please contact experienced tax lawyer Graeme Oddy at 416-446-5810 or Graeme.oddy@devrylaw.ca.

This blog was co-authored by articling student Emma Wilson.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

[1] Canada v Heavyside, 1996 CanLII 3932 (FCTAD) at para 10.

[2] Canada v Livingston, 2008 FCA 89 at para 17.

[3] Income Tax Act, RSC 1985, c 1 (5th Supp), s 160(1).

[4] Ibid.