Beware of getting money, gifts or transfers of property from a family member, including your spouse, if that person owes (or might possibly owe) any money to the Canada Revenue Agency (CRA), for either income tax or GST/HST.
The CRA has the ability to trace property or money that is transferred to anyone with whom the debtor does not deal “at arm’s length” — which includes any close family member (and depending on the circumstances can also include friends).
If a tax debtor transfers money or property (e.g., cash or the family home) to you, during a year in which, or for which, the debtor owes money to the CRA, or during any later year, the government can assess you under section 160 of the Income Tax Act for the net value of what you have received. (The same general rule applies under section 325 of the Excise Tax Act for any unremitted GST or HST the tax debtor may owe.)
The debt to the CRA could arise in various ways, such as:
• the debtor’s own income tax
- a failure to remit payroll withholdings (source deductions) or GST/HST collected by a person carrying on business
• a director’s assessment for the failure of a corporation to remit source deductions or GST/HST.
Example
Richard and Linda jointly own their home, which is worth $200,000 and is mortgage-free. In September 2023, Richard transfers his half-interest in the home to Linda, so that she now owns all of it.
Richard is a director of a corporation with a December 31 year-end. In November 2023, the business starts running into financial trouble, and it uses $130,000 in employee source deductions and GST/HST collections to pay creditors rather than remitting the funds to the CRA. Eventually the corporation goes bankrupt, leaving a trail of unpaid creditors including the CRA.
The CRA will be able to assess Richard for $130,000, as a director of the corporation, for the unremitted source deductions and GST. To escape liability he will normally have to show that he “exercised the care, diligence and skill that a reasonably prudent person would in comparable circumstances” (the “due diligence” defence).
Suppose Richard is found liable, but he has no assets to pay the $130,000?
The CRA can assess Linda under section 160 for $100,000 — the value of what Richard transferred to her, since the transfer took place during the same year. She will be personally liable for this amount, and if she has no other assets, the CRA will register a lien against the home (and could even force it to be sold).
Richard has thus made things much worse by transferring the house to Linda. All of her assets are now subject to seizure, not just the home.
Linda can be assessed at any time — even 5, 10 or 20 years after Richard’s liability arose. There is no limitation period on this assessment.
As noted above, the transfer need not be to a spouse to be caught. Transfers to other family members will fall into the net. So can transfers from a corporation to a shareholder.
Here are some other examples of cases where this rule has been held by the Courts to apply — some of them surprising:
• David and Diane live in a home that is registered in Diane’s name (and has been for years). David is the sole income earner in the family. David makes all the mortgage payments on the home. He is reassessed for income tax of an earlier year.
The mortgage payments can be considered a transfer of money from David to Diane, so Diane can be assessed for David’s tax debts. (Some court cases have allowed a reduction for the value of the free rent David has received from Diane, but others have not.) If she doesn’t have any money, the CRA may put a lien on her home.
• Mary is the sole shareholder of MaryCo, a small business corporation. MaryCo pays a $20,000 dividend to Mary. MaryCo ends up without enough money to pay its $15,000 tax owing for the year. The CRA tries to collect the debt from MaryCo but is unable to.
The CRA can assess Mary for the transfer of property from the company by way of dividend. Mary will likely be liable for $15,000 — even though she has already paid income tax on the $15,000 dividend! (The Courts have held that this total tax of about 130%-150% is valid.)
• Len is a majority shareholder of LenCorp, a corporation. Len owes $10,000 to Karen from a personal loan. Len arranges for LenCorp to pay $10,000 to Karen to pay off Len’s debt. LenCorp is then unable to pay its income tax or make its GST remittances for the year.
The CRA can assess Len for up to $10,000 of LenCorp’s tax debts. The payment to Len’s creditor (Karen) is considered to be a transfer of money to Len. (It will also be taxable to Len as a $10,000 shareholder benefit.)
• Keith leaves Canada and moves to the Bahamas with unpaid tax debts. The CRA cannot enforce its claim because he is outside Canadian jurisdiction, though they periodically contact him to ask him to pay. Twenty years later he dies, leaving money to his children, who still live in Canada. The CRA can assess the children to collect the ancient debt owing by Keith, plus 20 years’ interest — perhaps seizing their entire inheritance.
• Sally pays for her daughter’s wedding, at a time when she has a large debt to the CRA. Her daughter will be assessed for the amount Sally paid towards the wedding.
Exceptions
There are some exceptions to the “tracing” rule in section 160.
First, the rule does not apply to the extent the transferor receives consideration for the property transferred. Thus, in the first example above, if Linda had paid Richard $30,000 for the $100,000 interest in the home that he transferred to her (or if the transfer paid off a previous loan of $30,000 Linda had made to Richard), then the CRA would only be able to assess Linda for $70,000 — the net value of what he transferred.
Second, the rule generally does not apply to a transfer on marriage breakdown, if the transfer takes place under the terms of a court order (e.g., a divorce decree) or a written separation agreement. Thus, if Richard transferred his interest in the house to Linda because they had separated or were divorcing, the CRA might not be able to assess Linda. These rules apply to common-law partnerships as well as legal marriages.
Be Careful!
CRA collections officers will actively pursue transfers by delinquent taxpayers. For example, they will search real estate transfer records, banking records and other sources to find transferees that can be assessed.
So if you are offered a gift of money or transfer of property by a family member, or even an inheritance — be careful! The gift could come with strings attached, in the form of a future assessment from the CRA.
