Income Tax Act section 160 – Tax Liability Associated with Transfers to Related Parties

Income Tax Act section 160 – Tax Liability Associated with Transfers to Related Parties

Generally speaking, individuals and corporations are able to sell or transfer their property to anyone without concern.   However, there are times when a transferor cannot do whatever he or she would like to do with his or her property including, giving it away, according to the Income Tax Act (Canada).  According to section 160 of the ITA, receiving property from someone can result in significant and unexpected consequences to the recipient if: (a) the Transferor is indebted to the CRA; (b) the Transferor and Transferee are related; and (c) the transferee did not provide the transferor with fair market value consideration for the property.

Let’s examine a relatively common scenario:

Ben lives with his wife in their home which is currently worth about $500,000. Ben has no other assets.  Ben is a consultant working as an independent contractor and over the past few years his business has been in decline. Ben owes CRA $200,000 for unpaid personal income tax and HST (much of it penalties and interest) that relates to several years prior to 2015 and originated because Ben failed to file returns for those years.

Ben is now insolvent and, therefore, unable to refinance his house to pay off the CRA debt.

In June of 2016 Ben decided to transfer his share of his home to his wife so that now she owns the home outright. Because Ben was indebted to the CRA at the time that he transferred his half interest in the home to his wife, section 160 of the Income Tax Act will likely apply.

In 2017, when CRA becomes aware of the transfer, Ben’s wife receives an assessment from the CRA which reads something like this:

This Notice of Assessment is issued in respect of the liability under subsection 160(1) of the Income Tax Act and other applicable Act(s), in the amount of $100,000, in respect of the transfer of 50% of [home address] on or about June 1, 2016 from [husband] to [wife]. You are required to pay the amount assessed immediately. Failure to do so may result in further enforcement action.

Because Ben is insolvent he has the following option available to him to:

  1. File for bankruptcy. Unfortunately, this would not prevent the CRA from continuing its enforcement action against his wife; or,
  2. File a proposal to his creditors. The Proposal could include a clause which, if accepted by the CRA, would require the CRA to withdraw their assessment of his spouse.  

The CRA would consider many factors before accepting such a proposal, however, if the proposal is structured properly it may be in the CRA’s best interest to do so. For example, if the proposal is structured such that if CRA received an equivalent amount in Ben’s proposal to what they otherwise would collect from his wife through enforcement action, they may be prepared to accept Ben’s proposal and withdraw his wife’s section 160 assessment. The proposal would give Ben the option to repay a portion of his debt to the CRA over time without incurring further interest or penalties.

We have assisted with numerous proposals where the CRA has agreed to withdraw an assessment of a related party levied under section 160 of the Income Tax Act. The negotiations can be difficult but, ultimately, if a resolution can be reached, it can be beneficial to all parties involved.

About Albert Gelman Inc.

Albert Gelman Inc.’s corporate and consumer insolvency group has over 100 years of combined experience working with businesses, individuals and creditors in insolvency related matters. 

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