Section 160 and the Power to Collect - Gavin Laird LL.B.
SECTION 160 AND THE POWER TO COLLECT LAIRD & COMPANY GAVIN LAIRD ANDREW HUTTON Laird & Company, www.lairdlaw.ca
SECTION 160 OF THE INCOME TAX ACT• What is section 160? • Section 160 is a broad collections power granted to the CRA aimed at transfers of property to non-arm‟s length parties. • Many people are unaware of section 160 and enter into transactions thinking that they will „beat the system‟ and avoid CRA collections. • A common example: a taxpayer severs the joint tenancy on his/her home and instead puts only their spouse on title to the home. Laird & Company, www.lairdlaw.ca
SECTION 160 OF THE INCOME TAX ACT• Subsection 160(1) reads: • (1): where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by any means of a trust or by any means whatever, to • (a) the person‟s spouse or common law partner or a person who has since become the person‟s spouse or common law partner, • (b) a person who was under 18 years of age, or • (c) a person with whom the person was not dealing at arm‟s length • the following rules apply: Laird & Company, www.lairdlaw.ca
SECTION 160 OF THE INCOME TAX ACT• (d) the transferee and transferor are jointly and severally liable to pay a part of the transferor‟s tax under this Part…• (e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of: • (i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and • (ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxatino year in which the property was transferred or any preceding taxation year,• but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act. Laird & Company, www.lairdlaw.ca
SECTION 160 OF THE INCOME TAX ACT• In plain(er) English, section 160 makes the transferee of property jointly and severally liable for the transferor‟s tax debt up to the lesser of: • The fair market value of the property (or the difference between the consideration given for the transfer and the fair market value) • The total of all tax debts that the taxpayer is liable to pay in either the tax year when the property is transferred or any preceding tax year (i.e. the transferee is not liable for tax debts arising after the transfer of property. However, when the tax debt arises will be a key issue). Laird & Company, www.lairdlaw.ca
THE PRACTICAL EFFECTS• Practically speaking, section 160 can make a taxpayer‟s spouse or children (or other non-arm‟s length party) liable for some or all of the taxpayer‟s tax debt.• There is no requirement that the transferee have knowledge of the tax debt or participate in the transfer in any way – it can be as simple as the taxpayer transferring $$ into a bank account one-way.• This can lead to nasty surprises for spouses or children who are on the hook for a giant tax bill down the road with no means to pay it. Laird & Company, www.lairdlaw.ca
WHAT TRIGGERS SECTION 160?• The Federal Court of Appeal has consistently found four requirements to trigger section 160: • There must be a transfer of property, either directly or indirectly by means of a trust or any other means whatever. • The transferor must be liable to pay tax under the Act at the time of the property transfer; • The FMV of the transferred property must exceed the FMV of the consideration given for the transfer • The transferee must be a non-arm‟s length party, a person under 18 years old, or the transferor‟s spouse or common- law partner at the time of transfer OR a person who has since become the person‟s spouse or common-law partner. Laird & Company, www.lairdlaw.ca
SECTION 160 EXAMPLE• John Smith files his 2007 tax return on time. In 2008, he removes himself from title to the family home and puts his wife on title only. In 2009, the Minister reassesses John Smith‟s 2007 tax year. Once it goes to Collections, the CRA issues a section 160 assessment against John Smith‟s wife because the house transfer occurred after the 2007 tax debt, even though the reassessment was not issued until 2009. John Smith‟s wife will be jointly and severally liable for John Smith‟s 2007 tax debt.• In the worst case scenario, if John Smith skips town, John Smith‟s wife would be on the hook for the entire 2007 tax debt and might eventually be forced to sell the house to pay it. Laird & Company, www.lairdlaw.ca
CANADA V. LIVINGSTON, 2008 FCA 89• This Federal Court of Appeal decision represents the high watermark on section 160.• First sentence: “The power to tax means little without the power to collect.”• The decision conveys that the Court views section 160 as a very broad power and taxpayers will have a difficult time beating a section 160 assessment. Laird & Company, www.lairdlaw.ca
CANADA V. LIVINGSTON, 2008 FCA 89 • L and D had been friends for over 10 years. D owed $80,000 to CRA personally, and her corporations owed $70,000. D regularly transferred funds between her various banking and brokerage accounts to defeat CRA collections. L was “well- aware” of D‟s collections problems. • L opened a bank account in late 2001. However, D was the only person who used the account: • L gave D the debit card to the account • L signed blank cheques for D to use on the account • All bank statements were sent to D rather than L • From Oct 2001-April 2003, D deposited approx. $36,000 into the account and used the money to pay her expenses. • L retained the ability to take money from the account if she had chosen to do so, and also could have closed the account at anytime Laird & Company, www.lairdlaw.ca
CANADA V. LIVINGSTON, 2008 FCA 89• D declares bankruptcy at the end of April 2003 and CRA gets almost nothing. D does not disclose that she was beneficiary of trust funds (i.e. L‟s bank account)• The Tax Court judge found that there was a transfer of property to a non-arm‟s length party while D owed the tax debt. However, the Tax Court judge also concluded that there had been adequate consideration given (because L gave use of the bank account in return for access to the funds D was depositing). Laird & Company, www.lairdlaw.ca
CANADA V. LIVINGSTON, 2008 FCA 89• The Federal Court of Appeal overturned the Tax Court and found that there was no consideration, at para. 28: • “The Tax Court Judge erred in law by failing to conduct any analysis of the fair market value of the consideration. He simply concluded that it was “adequate.” I fail to see how the fair market value of the consideration, if any did exist, would be equivalent to the funds deposited. Why would Ms. Davies give an amount of money to the respondent in consideration for the ability to withdraw the money, when the respondent retains the power to take the money?” Laird & Company, www.lairdlaw.ca
CANADA V. LIVINGSTON, 2008 FCA 89• While this case is a relatively simple fact pattern, it emphasizes the Court‟s tendency to interpret section 160 broadly.• Taxpayers can have a difficult time winning a section 160 case on a technicality if the „common sense‟ approach seems to dictate that section 160 applies. Laird & Company, www.lairdlaw.ca
TIMING OF A SECTION 160 ASSESSMENT• The CRA can issue a section 160 assessment at any time.• There is no statute-barred requirements on CRA when it comes to the use of section 160.• The Supreme Court of Canada confirmed in The Queen et al. v. Addison & Leyen Ltd. et al., that there can be no judicial review of delay in issuing a section 160 assessment because the Minister may assess “at any time.” Laird & Company, www.lairdlaw.ca
TIMING OF THE TAX DEBT• One might think that a tax debt only arises when the Minister reasssesses the taxpayer, so any transfer before the reassessment is not captured by section 160 – THIS IS NOT THE CASE• For purposes of section 160, courts have held that the tax debt arises in the tax year in which it was reasssessed. The timing of the reassessment does not matter.• EX: John Smith is reassessed in 2007 for his 2004 tax year. In 2005 he transferred $10,000 to his son. John Smith‟s tax debt arose in 2004, not 2007, and therefore the transfer of $10,000 is captured by section 160. Laird & Company, www.lairdlaw.ca
WHAT IS A ‘TRANSFER’ OF PROPERTY?• Section 160 is worded as broadly as possible: transfers include transfers of any kind whatever and also transfers to a trust.• Livingston confirmed that there is a transfer of property even where beneficial ownership does not change (i.e. because a transfer to a trust involves separating legal and beneficial title, and section 160 encompasses those transfers). Laird & Company, www.lairdlaw.ca
DIVIDENDS• A 2010 Federal Court of Appeal decision confirms that declaring dividends is a transfer of property under section 160.• 2753-1359 Quebec Inc. v. Canada, 2010 FCA 32: • “Dividends are property within the meaning of the Act see subsection 248(1). According to case law, there is no doubt that the payment of dividends is a transfer of property within the meaning of section 160.” Laird & Company, www.lairdlaw.ca
DIVIDENDS• However, is there consideration given for the transfer of dividends? • Arguably yes – a shareholder who purchases shares gives consideration for the „bundle of rights‟ that is the shares. One of those „rights‟ is the right to receive dividends if declared. • However, in 2753-1359 Quebec Inc., the Court rejected a slightly different line of argument that the dividend was consideration for the settlement of debt created when the dividend was declared. • Any argument that there was proper consideration given for a dividend would be an uphill battle at Tax Court. Laird & Company, www.lairdlaw.ca
OTHER CONSIDERATIONS• If clients have outstanding tax debts to CRA, and are contemplating property transfers, they should be advised of the broad impact of section 160.• A potential silver lining: challenging the underlying assessment: • If the CRA raises a section 160 assessment, the limitation period on challenging underlying assessment (i.e. the assessment that gives rise to the original tax debt) starts over. • Even if it has been more than three years since an underlying assessment, if the CRA raises a section 160 assessment based upon it, then the underlying assessment is open to attack. Laird & Company, www.lairdlaw.ca
Q&A• Laird & Company Tax & General Litigation 204-12165 Harris Rd. Pitt Meadows, BC V3Y 2E9 T: 604-460-0051 F: 604-460-0053 Gavin Laird: firstname.lastname@example.org Andrew Hutton: email@example.com Laird & Company, www.lairdlaw.ca
Cassidy v. Canada• Cassidy is a 2011 decision by Justice Sharlow of the Federal Court of Appeal.• Very important for principal residence cases with land in excess of the ½ hectare basic exemption.• Wonderful decision correcting a historic error in the Crown‟s interpretation of the law.
Cassidy v. Canada• For capital gains purposes, principal residence is defined in s. 54 of the Income Tax Act.• The revelant portions are the opening words and paragraph (e) (the “1/2 hectare rule”):
Cassidy v. Canada• Preamble:“principal residence” of a taxpayer for a taxation year means a particular property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation and that is owned, whether jointly with another person or otherwise, in the year by the taxpayer, if [...]
Cassidy v. Canada• Paragraph (e) – ½ hectare rule:(e) the principal residence of a taxpayer for a taxation year shall be deemed to include, except where the particular property consists of a share of the capital stock of a co- operative housing corporation, the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence, except that where the total area of the subjacent land and of that portion exceeds ½ hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.
Cassidy v. Canada• SO: • ½ hectare included in principal residence exemption but reverse onus on anything over ½ hectare• Reverse Onus met by subjective or objection arguments: • Subjective: water view, flower bushes etc… (typically weaker) • Objective: zoning, ALR (typically stronger)
Cassidy v. Canada• Objective Test: • If the property could not legally be subdivided it would be unfair/unjust to tax person on the portion that they could not sell.• Canada v. Yates  2 FC 730: The defendants could not legally have occupied their housing unit as a residence on less than ten acres. It follows that the entire ten acres, subjacent and contiguous, not only "may reasonably" be regarded as contributing to their use and enjoyment of their housing unit as a residence; it must be so regarded. It also follows that the portion in excess of one acre was necessary to that use and enjoyment.
Cassidy v. Canada• BUT objective test applied by the CRA (and arguably the Courts) only at the time of disposition.• SO a rezoning before disposition could result in loss of the principal residence exemption. [Very unjust/punitive]
Cassidy v. CanadaIn Cassidy, J.A. Sharlow applied the formula in 40(2)(b) of the ITA:• 40. (2) …• (b) where the taxpayer is an individual, the taxpayer’s gain for a taxation year from the disposition of a property that was the taxpayer’s principal residence at any time after the date (in this section referred to as the “acquisition date”) that is the later of December 31, 1971 and the day on which the taxpayer last acquired or reacquired it, as the case may be, is the amount determined by the formulaA - (A × B/C) – D• A = CG• B = 1 + # of Years Owned as Principal Residence (While Resident)• C = Years Owned• D = Not applicable
Cassidy v. Canada• Crown‟s arguments that Yates and Stuart Estate dictated focus only on point of disposition dismissed.• Result: pro rata formula now applies• Sane and just result• Not aware of any appeal
Q&A• Laird & Company Tax & General Litigation 204-12165 Harris Rd. Pitt Meadows, BC V3Y 2E9 T: 604-460-0051 F: 604-460-0053 Gavin Laird: firstname.lastname@example.org Laird & Company, www.lairdlaw.ca