Taxpayer liable for spouse’s tax liability for unremitted source deductions
Under the Income Tax Act, a director of a corporation can be liable for the corporation’s failure to remit source deductions to the Canada Revenue Agency (CRA), such as income tax that is withheld from salary of the corporation’s employees.
Under a different rule (the “transfer of property rule”), if a person transfers property to a non-arm’s length person such as a spouse, then the transferee can be liable for the transferor’s tax debts owing for the year of transfer or previous years.
There have been many recent cases where a transferee spouse has been held liable for a transferor's liability as a director which arose from the corporation's liability for source deductions (or GST/HST).
In the recent Colitto case, the transferee (wife) argued that her husband's liability as director for the corporation's unpaid source deductions did not arise until the CRA had attempted to collect the corporation's debt and "execution had been returned unsatisfied" – a legal Federal Court step that the Income Tax Act says is required before the director is liable.
The corporation's unremitted source deductions arose in 2008, and that was when the husband became liable as director. He transferred property to his wife, also in 2008.
In 2011, after the CRA could not collect from the corporation (i.e. "execution was returned unsatisfied"), the CRA assessed the husband as director for the corporation's source deduction liability. Some years later, the CRA then assessed the wife for the value of the property the husband transferred to her, and she appealed to the Tax Court of Canada.
The Tax Court held that, because the husband could not yet be assessed as director in 2008 (since the CRA had not yet tried to execute judgment against the corporation), the wife was not liable for the transfer of property.
The CRA appealed further to the Federal Court of Appeal, which allowed the appeal and found the wife liable. The Court of Appeal held that the director's liability arises at the time of the corporation failing to remit the source deductions, even though the CRA could not assess the director until the CRA had tried to collect from the corporation.
Thus, the wife ended up on the hook for the value of the property the husband transferred to her.
