The Canada Revenue Agency (CRA) has continued to make massive improvements in the area of income tax debt collection, and is showing no signs of slowing down. Methods traditionally reserved for extreme cases, such as wage garnishments, liens, and the invoking of other sections of the Income Tax Act (ITA) are quickly becoming standard procedure. It is quite clear that the Trudeau government has identified significant gaps in the income tax debt collection practices of the CRA, and through their substantial investment (approximately $300 million), are anxious to close these gaps as quickly as possible. Many income tax professionals are already aware of the tactics previously mentioned, however, there are provisions within the ITA that can prove to be incredibly detrimental to a client, specifically, Section 160. This section of the ITA states that any person that has received a transfer of property from an individual with which they have a non-arm’s length relationship, who also has an outstanding income tax debt with the CRA, can become liable for the tax debt of the individual who has transferred the property to them, if the transfer was done for less than fair market value..
The most common example of the use of section 160 is a situation where an individual who owes taxes, transfers a home, cottage or other real estate holding to their spouse, hoping to avoid CRA attaching a lien to the property. The spouse who is the transferee of the property can be assessed for the income taxes owed by the transferor, up to the value of the property transferred.
The aggressive use of this legislation was made evident to us when we encountered a father who owed money to the CRA, while at the time paying the post-secondary tuition for his two children. As a result, the CRA assessed the children for the entire tuition their father paid. Since the children were not working during their studies, interest was accruing on the taxes assessed and the children faced bankruptcy immediately following their graduation. Of course, the children had no way of knowing their father owed income taxes and clearly accepted the payment of the tuition by their father in good faith. It is a frightening situation when spouses, and even children, become entangled in the debt recovery process, but this issue is also capable of creating contention within companies at a senior level as well.
Recently, we saw the application of Section 160 on demonstration when a company owner took dividends instead of salary to reduce income taxes. The problem with this scenario is that the company paid dividends when it was unable to pay its own corporate income taxes. Since the CRA considers dividends to be a transfer of property from the corporation to its shareholder (a related party), the shareholder was assessed under section 160 for the outstanding corporate income taxes
Handling issues such as the two examples cited above can be difficult without the assistance of a professional who is well versed on the subject. By working with a Licensed Insolvency Trustee (LIT), individuals and corporations are able to leverage the experience LIT’s bring to the task of negotiating with the CRA, and often reduce the payment required, or simplify the process of coming to a solution. For example, in the scenario involving the children who received tuition payment from their father, we recommended that the father to file a Proposal to CRA under the Bankruptcy and Insolvency Act. As part of the Proposal the CRA, among other things, agreed not to take steps to collect the debt from the children upon the father completing his proposal.
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