Canadian Tax Law Haiku of the Week:

Dreaded 160!

CRA gets paid, even

If it’s not your tax!!


Unsurprisingly, the Income Tax Act (the “Act”)[1] frowns upon those who try to evade paying their outstanding tax liabilities by shifting assets to friends and relatives by means of what is referred to in the Act as “a non-arm’s length transaction for no consideration”.

For example, if someone has an outstanding income tax liability with the Canada Revenue Agency (the “CRA”), they often try to transfer their interest in a significant asset, say the family residence, to their spouse. The may believe that if they are left with no assets to seize, the CRA will just give up and go away. If this seems too good to be true, well, that’s because it is. Pursuant to section 160 of the Act, all that has happened is that the spouse is now jointly and severally liable to the CRA for the tax debt up to the value of what was transferred,[2] less anything given in return; up to a limit of the transferor’s tax liability as of the year of transfer.[3] In other words, there can be good reasons for looking a “gift horse in the mouth” as the old saying goes, especially if the “gift” comes with an attached tax liability.

Thanks to section 160, even the most common-place of tax plans can have very serious unintended consequences. Dividend sprinkling is a common, highly efficient, tax structure available to active small businesses. Consider a married couple where one spouse runs the business, but the other spouse has a relatively low income, and who are both 50% shareholders of the corporation. Dividend sprinkling, or issuing dividends (which are taxed at a lower rate to ordinary income) to a lower-earning spouse, is one of the most tax-friendly methods they can use to receive income from the company.

However, in the event that the corporation itself has an outstanding income tax liability, or, even worse, a GST/HST liability, even the above type of transfer becomes a problem for all concerned. It will result in both spouses being jointly and severally liable for the corporation’s outstanding tax debt. We recently dealt with a case in which this kind of problem arose, and needless to say, the spouse, who took the position that the company’s tax liabilities had nothing to do with them, was not very happy to be informed otherwise.

Section 160; Chapter & Verse

Subsection 160(1) makes the recipient of a non-arm’s length transfer liable for money or property transferred by a person who owes tax. Essentially, it stops a tax debtor from transferring their assets to a spouse or other relative and then going to the CRA claiming that they do not have any assets with which to pay their debt.

The criteria for determining whether section 160 provision was laid out by the Federal Court of Appeal in Canada v. Livingston:[4]

The transferor must be liable to pay tax under the Act at the time of transfer;
There must be a transfer of property, either directly or indirectly, by means of a trust or by any other means whatever;
The transferee must either be:
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;
A person who was under 18 years of age at the time of transfer; or
A person with whom the transferor was not dealing at arm’s length.
The fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee.
The following cases are but a few recent examples of section 160 in action.

Palmer; The Family that Owes Together…

In Palmer,[5] the Tax Court of Canada (“Tax Court”) stated that while section 160 can produce harsh results, it is contained in the Act as a tax collection tool to prevent taxpayers from transferring property to a spouse or other non-arm’s length party in order to avoid collection efforts respecting a tax liability.[6] The Tax Court tried to do everything it could to help the appellant, Mrs. Palmer, an unrepresented litigant, including the unusual step of adjourned the hearing to allow the Appellant an opportunity to obtain an expert report,[7] but in the end its hands were tied and Mrs. Palmer was liable for her husband’s tax debt.[8]

On March 26, 1999, Mr. Palmer transferred two parcels of land from his sole ownership to the joint ownership of Mrs. Palmer and himself. At the time of this transfer, the fair market value of the consideration was listed as nil; however, the Minister of National Revenue (the “Minister”) assessed the property at $47,500.[9]

On June 1, 1999, the Mrs. Palmer and her spouse transferred this property to their son. At the time of this transfer, the parties again listed the fair market value as nil. On August 31, 2004, their son transferred the property to Mrs. Palmer in her sole name.[10] The fair market value was still listed as nil; however, the Minister assumed that the fair market value of this property, as of August 31, 2004, was $140,000.[11]

Mr. Palmer may have thought they were being clever, but all actually done was contaminate the rest of his family with his debts. Mrs. Palmer was also jointly and severally liable for 100% her husband’s tax debt up to half of the interest in the land ($23,750) as a result of the March 26, 1999 transfer. However, because the land was transferred back to her, in her sole name, on August 31, 2004, she was also jointly and severally liable for more under subsection 160(2). Their son was also jointly and severally liable, but was not part of this Appeal. It’s possible that he did not have any assets, so the Minister just came down on Mrs. Palmer.

Mr. Palmer’s tax liability flowed through the series of transfers to Mrs. Palmer and their son. The Tax Court held that Mrs. Palmer had not provided enough evidence to demolish any of the Minister’s assumptions. Consequently, the Tax Court allowed the appeal, but to the extent that the fair market value of the property as of March 26, 1999 was reduced from $90,000 to $47,500, resulting in an overall tax liability reduction from $82,964 to $61,714. Costs are awarded to the Minister.

Budwal; Receiving funds from a corporation

The situation described in Budwal v. The Queen[12] is slightly different from the example set out above. In Budwal, one spouse was not found liable under s.160, but only because she did not actually receive any dividends. Budwal Investments (a corporation owned 60-40 by Mr. & Mrs., Budwal, respectively), failed to report its net profit from two sales of a four-unit townhouse project (the “Blackberry Project”) in its income tax return for the 2004 taxation year.

After a drawn-out process, the Minister reassessed Mr. & Mrs. Budwal under subsection 160(1) with respect to Budwal Investments’ unpaid tax liability of $110,052.45. Effectively, just days after the Blackberry Project had closed, $100,000 was transferred to a numbered company, which then immediately issued two cheques for $50,000 to Mr. Budwal. The Tax Court rejected the Budwal’s argument that the amounts transferred were paid to satisfy outstanding debts on the basis that this story conflicted with the corporation’s financial statements which showed that the Budwal’s actually owed Budwal Investments due to a previous shareholder loan.[13] As a result, Mr. Budwal was liable under s.160 for the value of the amount transferred ($100,000) to him without consideration.

However, Tax Court also rejected CRA’s allocation of tax liability based solely on the ratio of shareholdings, concluding that Mrs. Budwal was a “passive shareholder” and presented a “prima facie case that she did not appropriate the funds that the Minister alleged she did.”[14] Given that the funds had been indirectly transferred to Mr. Budwal, and not to her, this just makes sense. As a result, Mr. Budwal’s appeal was dismissed, but Mrs. Budwal appeal was allowed and the section 160 assessment against her was vacated. The court did not consider, because the Minister did not assume and Crown did not put it into evidence, whether the two cheques were deposited into an account solely in Mr. Budwal’s name or into jointly owned account in both of their names or that she had access to or benefited from. We would suggest that had it been the later set of circumstances, Mrs. Budwal might not have been able to claim that she never received any transfers of property.

Bekkerus; De-taxers lose yet again

The next case involved assessments under subsection 160(1) against Roseann and Desiree Bekkerus (the “taxpayers”), the wife and mother of Rick Bekkerus, who owed a substantial amount of income tax. Rick tried to pull a fast one on the CRA and transferred property to his wife and mother for no consideration.[15] The taxpayers provided a unique defense to the Tax Court, arguing that the Act failed to describe a taxpayer as a person who “gains her livelihood in the private sector.”[16]

In 2005, Rick transferred his 2002 Harley-Davidson motorcycle to Desiree for no consideration. At that time he owed approximately $206,000 to the Minister for income taxes assessed. The Harley had an assumed fair market value of $19,000. Then in 2011, Rick transferred his 2011 Lexus RX450H to Roseann for no consideration. At that time he owed the Minister in excess of $3,000,000 for income taxes assessed. The Lexus had an assumed fair market value of $51,500. [17]

The Minister raised assessments equal to the fair market values of the Harley and the Lexus, respectively, against Desiree and Roseann respectively, as transferees under section 160 of the Act.

The taxpayers argued that they have never “resided” on federal lands or been governmental employees and have never performed a function for government or held office or employment for profit. As a result, they are not subject to the Act.[18]

Not surprisingly, the Tax Court rejected these arguments.[19] The Tax Court held that section 160 does not require Desiree or Roseann to be a taxpayer, as the section only refers to “any person” and that Parliament is given “clear, broad and enumerated powers of taxation of all Canadians.” Moreover, the Act does not limit the assessment of such taxes to government employees, office holders or residents of federal lands.[20]

In Bekkerus, the taxpayers (whether they consider themselves that or not) attempted to use somewhat innovative versions of a set of arguments referred to as “De-taxing”. The basic argument is that the law just does not apply to flesh and blood people, rather just to corporations, employees, taxpayers, residents of federal lands and the like. Therefore, if one somehow metaphysically separates one’s personal existence from one’s economic life, the person is not taxable. This is, of course, utter and complete hogwash. However, that has not stopped people from making tons of money doing seminars telling people about “the secret” (one of the biggest proponents was convicted of tax evasion last year!!) and from thousands of people either taking this position and/or jumping on the bandwagon once they have been reassessed for tax.

So lets just get this settled right now. These “De-Taxer” arguments do not work. Period. They are wrong on the law and make no sense. However, regardless, and this is the part that people never seem to understand: Tax judges are lawyers paid by the government. Their entire livelihood, power, prestige and sense of professional self derives from the law and their intimate knowledge of the tax law and how it applies. So a Tax Court judge with often close to decade of higher education and a lifetime career in tax law is going to cede to a “De-Taxer” and say “you are right, I am all wrong, I have no power over you, you and everyone else like you does not have to pay any tax ever again, and so myself, my family and all of my friends will now give up our lives and sole source of income and go live on the streets in abject poverty because we failed to realize that you know so much more than I do about what the Income Tax Act says.” …. Yeah, I think not. So these arguments do not make sense, and even if they did, they won’t work.

Connolly; Transfers between spouses

Connolly v. The Queen[21] dealt with an assessment of the taxpayer under subsection 160(1) in respect of transfers from her common law spouse at a time when he was a tax debtor. Ms. Connolly was assessed for the amount of $76,884.17 in respect of cheques she received from her common law spouse, Wayne MacVicar, while he was a tax debtor between February 10, 2003 and October 31, 2003.

In 1992, 1997 and later in 2004, Mr. MacVicar filed for bankruptcy. Each time his only creditor was the Minister.[22]

According to Ms. Connolly, Mr. MacVicar had poor credit and he relied on her for assistance to finance his businesses. She knew that Mr. MacVicar had declared bankruptcy and claimed to have been his banker by extending him credit to pay his business and living expenses.[23] Ms. Connolly argued that Mr. MacVicar did not have a bank account and she primarily used one of her three accounts to help him with his businesses. She deposited the cheques he received from his businesses into this account and withdrew amounts in cash so he could pay his workers and other expenses. She also had a line of credit which was used only by Mr. MacVicar for his businesses. She leased a truck in her name for Mr. MacVicar to use in his businesses[24]

By her calculations, between February 10, 2003 and October 31, 2003, Mr. MacVicar had given her cheques which totalled $76,884.17. However, he was still indebted to her at the end of October 2003. She calculated his indebtedness to her at the end of October 2003 to be $47,309.07 or $106,890.57, if she included the cash amounts she lent to Mr. MacVicar.[25]

While a loan can be consideration for the purposes of subsection 160(1), the onus was on Ms. Connolly to demonstrate that a loan existed at the time of transfer, and the fair market value of that loan. [26] Despite not having any agreement in writing, the Tax Court held that this alone was not fatal to Ms. Connolly’s case.[27] However, because she had not provided credible evidence to support a loan and due to inconsistencies in the evidence and a lack of records or receipts, the Tax Court dismissed the appeal.[28]

For a variety of reasons, Ms. Connolly’s evidence was found not credible. Despite claiming she had records on her computer, Ms. Connolly did not bring these to Court, and alleged that she had destroyed them.[29] There were also inconsistencies in the testimonies of Ms. Connolly and Mr. MacVicar, no reliable documentary evidence of a loan and only unsupported statements that there was a loan.[30]


Whether you’re a small business owner drawing funds, a de-taxer with an unique but unsuccessful argument, or just trying to scam the CRA, no matter the situation, the CRA will use section 160 of the Act to get paid. If you try to move assets or money around in hopes that they will not find it or can’t get it, you are fooling yourself; these cases illustrate that there is no way around a tax debt. Moreover, there is no way to get around the fact that people have to pay taxes on their income. So regardless of what anyone ever tells you, you have to pay taxes.

You might have noticed that this blawg is relentlessly repetitive. This is for a good reason. We are hoping that if we just keep repeating ourselves; “You can’t avoid tax debts by transferring assets to relatives” maybe someone out there will clue in an not contaminate their family with their tax liabilities. There are ways to deal with tax debts, and we can help people with negotiating a payment plan with the CRA or asking for fairness relief or even fight the underlying tax if it is not too late already or even going bankrupt if necessary. Believe us, anything is preferable to dragging your family into this kind of mess.

By Jonathan N. Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law

This blawg is provided on an “For Your Information” basis, and cannot be considered to be legal advice. 

[1] Income Tax Act, RSC 1985, c 1 (5th Supp)

[2] Paragraph 160(1)(e)

[3] Subparagraph 160(1)(e)(ii)

[4] 2008 FCA 89 at paragraphs 17 to 19

[5] Palmer v. The Queen, 2015 TCC 28 [Palmer]

[6] Ibid at paragraph 13

[7] Ibid at paragraph 4

[8] The report was deemed inadmissible

[9] Ibid at paragraph 5 – the Minister initially assessed the value at $90,000, but conceded to a value of $47,500 at trial

[10] Ibid at paragraph 8 to 10

[11] Ibid at paragraphs 11

[12] 2014 TCC 370 [Budwal].

[13] Ibid at paragraphs 16 to 18

[14] Ibid at paragraph 21

[15] Bekkerus v. The Queen, 2014 TCC 311 [Bekkerus].

[16] Ibid at paragraph 2

[17] Ibid at paragraph 3

[18] Ibid at paragraph 8

[19] Ibid at paragraph 10

[20] Ibid at paragraph 10

[21] 2014 TCC 55 [Connolly]

[22] Ibid at paragraph 4

[23] Ibid at paragraph 6

[24] Ibid at paragraph 7

[25] Ibid at paragraph 8

[26] Ibid at paragraph 34

[27] Ibid at paragraph 35

[28] Ibid at paragraph 34

[29] Ibid at paragraph 41

[30] Ibid at paragraph 42