How Can I be Assessed for Someone Else’s Tax Debt? – Section 160(1) Assessments
Receiving a tax assessment or reassessment from the Canada Revenue Agency (CRA) is often alarming.
Imagine receiving a tax assessment that makes you liable to pay another person’s tax debt. Being assessed for someone else’s tax debt can be downright shocking.
The CRA has a collection tool at its disposal that allows it to assess a person for someone else’s tax debt and collect some or all of the tax debt from that other person.
Pursuant to subsection 160(1) of the Income Tax Act, where a tax debtor transfers property to a person with whom the tax debtor does not deal at arm’s length, and the tax debtor receives less than fair market consideration for that transferred property, the CRA can assess the recipient of the property for some or all of the tax debt of the transferor of the property.
The recipient of the property can be assessed the lesser of:
1. the tax debt owing by the transferor; and
2. the difference between the fair market value of the transferred property and the consideration received by the transferor.
Perhaps it is easiest to understand Section 160 Assessments by way of an example.
Joe has a tax debt relating to his 2005 taxes. Joe owes $300,000 in taxes and interest from 2005.
Joe has a brother Alex. Joe and Alex purchased a vacation property together in Canmore, Alberta in the 1980s. They paid $40,000 for the vacation property ($20,000 each) but it is now worth $180,000.
Joe and Alex shared the use of the vacation property for many years. They never intended to sell it.
In 2006 Joe was transferred by his employer to Halifax, Nova Scotia. Joe hasn’t used the property since his move and decided that he has no use for the vacation property.
Joe sells Alex his interest in the vacation property for $20,000 cash (the amount Joe paid for his ½ interest) allowing Alex to become the sole owner of the vacation property.
In the above scenario it is possible for the CRA to assess Alex for $70,000 of Joe’s tax debt.
Joe has transferred his ½ interest in the vacation property to Alex. Joe and Alex do not deal at arm’s length. Joe has not received fair market consideration for his interest in the vacation property. Joe’s tax debt existed at the time of the transfer.
The CRA can only assess Alex for $70,000 (not the entire $300,000 tax debt owed by Joe) because a section 160 assessment is limited by the fair market value of the transferred property less any consideration received by the transferor. The vacation property was worth $180,000 so Joe’s ½ interest was worth $90,000 and he received $20,000 in consideration.
The Tax Court of Canada has indicated that knowledge of the tax debt and intent to evade collection action of the CRA can be relevant to deciding whether a section 160 assessment should stand, however, intention and knowledge are not key components of the legislation.
Alex can be assessed pursuant to section 160 even if he didn’t know about Joe’s tax debt and even if the transfer of the property had nothing to do with the tax debt or the collection action of the CRA.
How to dispute a Section 160 Assessment?
The key components of a section 160 assessment are:
1. a person has a tax debt (the tax debtor) that exists from the year of the transfer or a preceding year;
2. the tax debtor transfers property to a person (the recipient);
3. the tax debtor does not deal at arm’s length with the recipient; and
4. the tax debtor receives less than fair market consideration for the transferred property.
Each of the key components of section 160 presents a potential argument for disputing a section 160 assessment. If you are disputing a CRA section 160 assessment by filing a Notice of Objection to the CRA Appeals Division or filing a Notice of Appeal to the Tax Court of Canada consider whether any or all of the following arguments might be convincing in your circumstances:
1. the tax debt arose after the transfer that is being impugned in the section 160 assessment;
2. there was no transfer of property from the tax debtor to the person being assessed;
3. the tax debtor and the person being assessed deal at arm’s length;
4. the fair market value of the transferred property is an amount less than the CRA has assessed; and
5. the tax debtor received fair market consideration for the transferred property.
When considering the argument that the tax debtor received fair market consideration for the transferred property, it is important to think of various types of consideration. For instance labour that had been expended by the recipient could be consideration for the transferred property, or a prior debt owing to the recipient that is offset by the transfer of property could be consideration for the transferred property.
It is also possible for a person assessed pursuant to section 160 to argue that the underlying tax debt (the transferor’s tax debt), is not correct.
Typically the CRA does not resort to collection under a section 160 assessment until it has attempted and failed to collect the amount from the original tax debtor.
However I have recently seen situations where the CRA has issued section 160 assessments without attempting to collect from the original tax debtor and without any indication that the CRA would be unsuccessful in collecting from the original tax debtor.