Can You Be Held Liable for Your Family Member’s Tax Liability?

The Canada Revenue Agency (the “CRA”) has extensive powers to collect unpaid tax debts, enacted through provisions in both the Income Tax Act and Excise Tax Act that allow it to pursue third parties who have received property or money from a taxpayer with outstanding tax liabilities. These provisions focus on addressing transfers made to individuals or entities with a “non-arm’s length” relationship to the taxpayer for the purpose of circumventing tax liability.

Non-Arm’s Length Relationships for the Purpose of Section 160

Non-arm’s length persons refer to individuals who are not acting independently of each other, often because of close personal or economic ties. Common persons who are deemed to be non-arm’s length for the purpose of Section 160 include:

• Spouses or common-law partners: A person legally married or in a common-law relationship with the taxpayer.
• Close family members: Parents, children, siblings, as well as other close relatives.
• Friends: In some cases, even close friendships can be deemed non-arm’s length if there is a significant level of influence between them.
• Corporations: Companies controlled by the taxpayer or where the taxpayer has decision-making authority.
• Any individual under the age of 18.

The CRA can trace and recover property transferred to these non-arm’s length parties if it believes the transfer was made without consideration or if consideration was received for less than the fair market value of the property.

Collections Provisions

Section 160 of the Income Tax Act applies when a taxpayer transfers property or money to a non-arm’s length individual during the year the tax debt arose or any year thereafter. If such a transfer occurs, the CRA can assess the recipient of the transfer (the “transferee”) for the value of the property or money received.

Similarly, Section 325 of the Excise Tax Act allows the CRA to assess a transferee for any transfers made to avoid collections against unpaid GST/HST owed by the taxpayer.

Conditions for an Assessment

The CRA can issue an assessment against the transferee if all the following conditions are met:

1. The taxpayer (the “transferor”) had an outstanding tax debt in the year of the transfer or a prior year,
2. The taxpayer transferred property or money to a non-arm’s length individual or corporation, and
3. The transfer was for less than fair market value.

Key Exceptions

Two key exceptions may limit the CRA’s ability to assess a transferee:

1. Receipt of Consideration: If the transferee gave consideration in exchange for the property or money transferred, the CRA can only assess them for the difference between the fair market value of the property and the consideration given.
2. Marriage Breakdown: If the transfer occurred due to a marriage or common-law relationship breakdown and was ordered by a court or outlined in a binding separation agreement, section 160 of the Income Tax Act does not apply.

Consideration and Assessments

When consideration is received by the taxpayer for a transfer, the CRA can only pursue the transferee for the net value of the transfer. This net value is calculated by deducting the amount of consideration paid from the fair market value of the property transferred.

Transfers Due to Marriage Breakdown

Transfers of property resulting from a court order or a legally binding separation agreement following a breakdown in marriage or common-law partnerships are exempt from section 160 assessments. This exemption applies to both legal marriages and common-law relationships.

Implications of Getting Reassessed

There is no limitation period for an assessment. This entails a transferee can get assessed at any point in time, be it 25 years from the date of the transfer. Furthermore, the transferor’s intent behind the transfer is irrelevant. Even if the transferor did not intend to avoid tax liability with the transfer, section 160 would still apply. Section 160 goes further to hold transferees liable even if both the transferor and transferee are unaware of the tax liability at the time of the transfer.

The broad interpretation of section 160 is detrimental to individuals as they may be held liable for another individual’s tax liability when they have no knowledge of any tax liability. Accordingly, extra caution must be taken when transfers of property are made with non-arm’s length individuals for consideration that is below the fair market value.

Conclusion

The CRA’s ability to recover unpaid tax debts from third parties through sections 160 of the Income Tax Act and section 325 of the Excise Tax Act is a powerful tool for tax collection. These provisions allow the CRA to pursue transferees in non-arm’s length transactions. Understanding the conditions under which these assessments apply, as well as the exceptions, is crucial for anyone involved in property transfers with an individual who may have a tax liability with the CRA. Failure to take proper precautions could lead to significant financial consequences for transferees long after the transfer happened due to the lack of a limitation period.

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.