Section 160 Assessments, What Are They and How Can You Fight Back?

 

As a small business owner, you have likely heard “put it in your spouse’s name, and you can protect it from CRA”. Well, as usual, advice from your neighbour is not always accurate.

Under Section 160 of the Income Tax Act, the Minister (CRA) can attach liability to another individual that has received a transfer of property when the person transferring the property has an outstanding tax liability.

Note: Section 160 of the Income Tax Act is virtually identical to Section 323 of the Excise Tax Act so the same rules apply to GST/HST liabilities.

So, to make this a little clearer, Jane and Bob are married. Jane owes the CRA $50,000 in taxes and the CRA is getting aggressive. To ‘save the house’, Jane transfers her interest in the home to Bob. Bob now exclusively owns the home.

Using the provisions of Section 160, CRA can assess Bob for the taxes that Jane owes because the transfer was merely a means of avoiding the tax liability.

 

Some Key Components

This section of the act applies to non-arms length transactions, in other words, the parties (be it individuals or corporations) must be ‘related’

Related is individuals connected by blood, marriage or adoption, spouses or children.

In the case of Corporations, 2 or more companies that are controlled either wholly or partially by the same individual or individuals.

There must be a transfer of property, either directly or indirectly;

The property must be transfered at less that the fair market value of the consideration given.

The property can include funds deposited into a bank account at one or more times.

There is no time limit on a S. 160 assessment

Bankruptcy of the original taxpayer will not cancel the S.160 assessment

There is a defense available under S.160 assessments, and it is to prove that Fair Market Value (adequate) Consideration was given in exchange for the transfer of property; this of course, can be very difficult to prove.

Adequate consideration can include:

  • Money, Rights, Intangibles or other Property
  • Payment in Cash or in Kind
  • Contractual obligation under a loan arrangement that obligates the other party to pay.
  • And, the transfer is not an obvious attempt to place assets or property beyond the reach of CRA.


There are a couple of exceptions to S. 160 that allow for the transfer of property without the transfer of tax liability, and they include:

  • Transfers pursuant to a Court Order
  • Transfers pursuant to a Separation Agreement in respect of a Partnership, Marriage, or Common Law relationship.

 

And, just to add fuel to the fire, consider the following:

If the Directors of a corporation declare and pay dividends at a time the corporation has a tax debt, the Directors will attract a S.160 liability as this is a “triggering” event under the legislation.

To clarify the above, if a corporation that you are a director of, pays you dividends, while there is an outstanding tax liability, that liability could be transferred to you!

The primary thing to remember is that the Income Tax Act is a very powerful and far-reaching piece of legislation. You cannot possibly find a way to avoid paying taxes without the long arm of the CRA reaching you.

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