Dec 19, 2024
Introduction: Derivative Tax Liability under Section 160 of Canada’s Income Tax Act
Section 160 of Canada’s Income Tax Act is a tax collection tool. It prevents tax debtors from trying to hide assets from the Canada Revenue Agency’s tax collectors by transferring those assets to spouses, friends, relatives, related corporations, or related trusts.
If section 160 applies, the person who received property from the tax debtor becomes liable for the tax debtor’s income-tax debts up to the time of the transfer. Section 160 captures a broad range of transactions, including the transfer of a matrimonial home.
The Tax Court’s decision in Vasilkioti v the King, 2024 TCC 101, illustrates that, if you receive or inherit a matrimonial property from a spouse with outstanding income-tax debts, section 160 allows the CRA’s tax collectors to chase you for the income-tax debts of your spouse. If the value of the house at the time of the transfer is less than your spouse’s income-tax debts, your derivative tax liability is capped at home’s value at the time of the transfer. You can also reduce the derivative tax liability by showing that you provided consideration for the asset that you received from the tax debtor.
But in Vasilkioti, the Tax Court of Canada highlights another strategy for avoiding derivative tax liability under section 160: demonstrating that the alleged tax debtor in fact owed no tax at the time of the transfer—or, more accurately: showing that the CRA failed to meet the burden of proving the existence of those tax debts.
This article first examines the mechanics of section 160 of Canada’s Income Tax Act. It then discusses the Tax Court of Canada’s Vasilkioti decision, and it concludes by offering pro tax tips from our esteemed Canadian tax-litigation lawyers on avoiding and disputing derivative-liability tax assessments under section 160.
The Mechanics of Section 160 of Canada’s Income Tax Act
Section 160 applies if all the following four conditions have been satisfied:
- A property was transferred. The language of section 160 contemplates a broad range of transfers: it covers situations where a tax debtor “transferred property, either directly or indirectly, by means of a trust or by any other means whatever.”
- At the time of the transfer, the transferor owed a tax debt to the Canada Revenue Agency.
- At the time of the transfer, the recipient was one of the following: (a) the transferor’s spouse or common-law partner (or a person who has since become the transferor’s spouse or common-law partner); (b) a person who was under 18 years of age; or (c) a person with whom the transferor was not dealing at arm’s length—e.g., a trust or corporation in which the transferor holds an interest.
- The recipient provided the transferor with consideration that was worth less than the transferred property’s value.
In other words, section 160 will catch a transaction in which you received assets from a related party with outstanding tax debts, and you didn’t provide full consideration in return—e.g., a dividend from a tax-debtor corporation, a gift of cryptocurrency or non-fungible tokens from a friend or relative with tax debts, a monetary gift from a spouse with tax debts, etc.
When section 160 applies, the transferor and the recipient both become “jointly and severally” liable for the transferor’s tax debt. As such, the recipient becomes independently liable for the transferor’s tax debt at the time of the transfer. This means that the Canada Revenue Agency’s tax collectors can now pursue both the original tax debtor and the derivative tax debtor for the tax debt. In fact, even if the original tax debtor goes bankrupt, gets discharged from bankruptcy, and is thereby released from the underlying tax debt, the derivative tax debtor still remains liable to the CRA until the derivative tax debt is fully repaid (e.g.: Canada v Heavyside, ibid.)
Subsection 160(3) governs how payments apply to discharge the joint liability. A payment by a taxpayer who inherited liability under section 160 will reduce both debts—that is, such a payment reduces not only the tax debt of the jointly liable third-party taxpayer but also the tax debt of the original tax debtor. But an ordering rule governs a payment by the original tax debtor. The original tax debtor must first pay off all tax debts exceeding the joint debt. In other words, before her tax payments can discharge the joint debt, the original tax debtor must first pay off all tax arrears belonging solely to her. Only then can the original debtor’s payments extinguish the joint debt.
Section 160 is an infamously harsh rule: It offers no due-diligence defence, it applies even if the transaction wasn’t motivated by tax avoidance, and it catches transferees who don’t even realize that they’ve received property from a tax debtor (e.g., see: Canada v Heavyside, 1996 CanLII 3932 (FCA), at para 3).
In addition, section 160 doesn’t contain a limitation period. So, the Canada Revenue Agency can assess you under section 160 for derivative tax liability years after the purported transfer. (Section 325 of Canada’s Excise Tax Act contains a similar rule relating to derivative liability for GST/HST debts. Hence, section 160 of the Income Tax Act bestows derivative income-tax liability for transfers by a person with income-tax debts; section 325 of the Excise Tax Act bestows derivative GST/HST liability for transfers by a person with GST/HST debts.)
Still, there are a few limits to the transferee’s derivative tax liability. The transferee’s derivative tax liability under section 160 is capped at the fair market value of the transferred property. The recipient’s liability is also offset by the amount of any consideration that the recipient provided for the property. Say, for example, that a corporation owes $1 million in tax debt to the CRA, and it pays a $25,000 dividend to a shareholder, and it pays another $25,000 in salary to that shareholder who is also an employee. The shareholder’s derivative liability under section 160 is $25,000—i.e., the value of the dividend. As an employee, however, the shareholder doesn’t incur any derivative liability under section 160 because the shareholder-employee provided consideration for the $25,000 salary—namely, the employee’s services.
Moreover, when assessing a taxpayer for derivative tax liability under section 160, the Canada Revenue Agency typically bears the burden of proving the existence of the underlying tax debt. For the most part, in Canadian tax disputes, the Canada Revenue Agency may make factual assumptions—that is, assume the facts favouring the CRA’s position without proving that those facts are true—and the taxpayer bears the initial burden of disproving the CRA’s factual assumptions. But when the Canada Revenue Agency issues a derivative-liability assessment under section 160 of the Income Tax Act, the burden may be flipped. In particular, the CRA bears the burden of proving the existence of the underlying tax debt “where the facts concerning the underlying tax debt are exclusively or peculiarly within the [CRA’s] knowledge.” (see Mignardi v The Queen, 2013 TCC 67, at para 41). In these cases, the tax jurisprudence therefore reverses the onus that would otherwise apply, forcing the Canada Revenue Agency to prove the dispositive facts as opposed to merely assuming them.
Vasilkioti v The King, 2024 TCC 101
In July 2008, Marilyn Vasilkioti and her husband jointly purchased a real property located in Toronto, Ontario.
On July 4, 2012, Marilyn’s husband transferred his 50% interest in the house to Marilyn. Since then, Marilyn had remained the sole titleholder of the property.
Sometime in 2014, Marilyn’s husband’s tax accountant filed income-tax returns for his 2007, 2009, 2010, and 2011 taxation years.
In response, on October 6, 2014, the Canada Revenue Agency issued notices of assessment relating to Marilyn’s husband’s 2007, 2009, 2010, and 2011 taxation years. These tax assessments stated that Marilyn’s husband’s tax debts totaled about $72,000.
These tax assessments, according to the Canada Revenue Agency, established that Marilyn’s husband owed about $72,000 in income-tax debts at the time that he had transferred his 50% interest in the property to Marilyn. As a result, on May 10, 2019—almost 5 years after the CRA assessed Marilyn’s husband and almost 7 years after she had received 50% of the home—a CRA tax collector assessed Marilyn under section 160 for $72,000 in derivative tax liability.
Marilyn’s Canadian tax-litigation lawyer disputed the derivative-tax assessment on Marilyn’s behalf by filing a notice of objection to the Canada Revenue Agency’s Chief of Appeals and by then filing a notice of appeal to the Tax Court of Canada.
Marilyn’s husband passed away in August 2016, before Marilyn’s tax appeal proceeded to a hearing before the Tax Court of Canada. As a result, Marilyn’s husband obviously couldn’t testify at the tax hearing about the income-tax returns that his accountant had filed on his behalf. Nor could he testify about the extent of his income-tax debts.
During the hearing before the Tax Court of Canada, the tax litigants agreed that Marilyn’s husband had transferred his 50% interest in the house to Marilyn on July 4, 2012. The tax litigants also agreed that one of the key issues in the tax dispute was whether Marilyn’s husband owed tax debts at the time that he’d transferred the 50% interest to Marilyn.
To address this issue, the Tax Court first needed to decide which of the two tax litigants—that is, Marilyn or the CRA—bore the burden of proving or disproving the extent of Marilyn’s husband’s tax debts. The Canada Revenue Agency’s Canadian tax-litigation lawyer argued that the burden lay with Marilyn because the facts about the underlying tax debts were not “exclusively or peculiarly within the [CRA’s] knowledge.” According to the CRA’s Canadian tax-litigation lawyer, Marilyn should bear the burden because she was the executor of her late husband’s estate and therefore had access to all relevant tax documents. Marilyn’s Canadian tax-litigation lawyer countered that the CRA should bear the burden of proving the correctness of the income-tax assessments that the CRA had issued to Marilyn’s husband on October 6, 2014. According to Marilyn’s Canadian tax lawyer, Marilyn had little knowledge of her late husband’s tax affairs, and she and her husband used separate accountants to prepare their respective income-tax returns. Thus, the Canada Revenue Agency possessed exclusive and particular knowledge about the facts concerning the tax debts underlying Marilyn’s derivative tax assessment.
The court sided with the taxpayer. The Tax Court of Canada found that the evidence had established that Marilyn knew nothing about her late husband’s financial and tax affairs. Marilyn’s husband took care of his own tax returns without Marilyn’s involvement whatsoever. Marilyn and her husband also used different accountants to prepare their respective income-tax returns. The Tax Court acknowledged that a derivatively assessed spouse can sometimes “easily access the necessary information to challenge an underlying assessment [from the tax-debtor spouse]” But the court made it clear that Marilyn wasn’t in this position: Her husband had passed away in 2016—three years before the CRA assessed Marilyn for derivative tax liability under section 160 of the Income Tax Act. As a result, she couldn’t have easily accessed the necessary information to challenge the underlying tax assessment. The court therefore decided that the Canada Revenue Agency bore the burden of proving the underlying tax debts because the CRA possessed exclusive and particular knowledge about the facts concerning those tax debts.
After deciding that the burden of proof fell on the CRA, the Tax Court of Canada went on to find that the CRA failed to meet that burden. In particular, the court found that the Canada Revenue Agency had adduced “unreliable evidence” at the tax hearing. The Canada Revenue Agency failed to produce copies of the income-tax returns that Marilyn’s husband had filed for the 2007, 2009, 2010, and 2011 taxation years. Instead, the CRA’s Canadian tax-litigation lawyer tendered as evidence “T1 case printouts,” which stemmed from the CRA’s internal computer records. These printouts showed that, contrary to what the CRA had alleged in its court filings, the Canada Revenue Agency did not assess Marilyn’s husband’s income-tax returns exactly as filed; the printouts showed instead that, before issuing the tax assessments for those years, the CRA had adjusted the income reported by the husband’s tax returns and applied penalties and interest.
Moreover, the court found multiple errors and inconsistencies in the T1 case printouts. For example, the printouts described the interest and penalties as “reported,” yet as the CRA’s witness admitted during her testimony, Marilyn’s husband very likely didn’t report these amounts in his income-tax returns. Similarly, when assessing Marilyn for derivative-tax liability, the CRA indicated that the underlying tax included amounts for “provincial tax.” Yet the T1 case printouts identified those amounts a relating to social-benefit repayments.
What’s more, during her testimony at the hearing, the Canada Revenue Agency’s witness, the CRA tax collector who issued the derivate-tax assessment, admitted that she hadn’t reviewed the actual tax returns that Marilyn’s husband had filed, nor did she review his tax assessments for the 2007, 2009, 2010, or 2011 taxation years. Hence, the Tax Court of Canada found that the Canada Revenue Agency had overall failed to adduce reliable evidence concerning the tax debts underlying Marilyn’s derivative-tax assessment under section 160 of Canada’s Income Tax Act.
The Tax Court of Canada therefore decided that section 160 didn’t apply to Marilyn and allowed her appeal, thereby cancelling over $72,000 in derivative-tax liability.
Pro Tax Tips: Avoiding & Responding to Derivative Tax Assessments under Section 160 of the Income Tax Act & Section 325 of the Excise Tax Act
If you receive an interest in a matrimonial home or family investment property from a spouse with outstanding income-tax debts or GST/HST debts, you’re exposed to derivative-tax liability under section 160 of the Income Tax Act or section 325 of the Excise Tax Act. And as the Vasilkioti case illustrates, the Canada Revenue Agency’s tax collectors may raise the derivative-tax assessment at any time—even years after the relevant transaction or underlying tax assessments. In Vasilkioti, the CRA tax collector assessed the taxpayer for derivative tax about 7 years after the transfer occurred and about 3 years after her husband, the alleged tax debtor, had already passed away. A derivative-tax assessment can undo all the benefits of even the most carefully crafted estate plan. Therefore, before you begin transferring assets to family members or begin any estate planning, consult one of our expert Canadian tax lawyers for advice on options to avoid or reduce your exposure to a derivative-tax assessment under section 160 of Canada’s Income Tax Act or section 325 of Canada’s Excise Tax Act.
There are several common strategies for challenging a derivative-tax assessment under section 160 or section 325. For example, you can show that the transferee provided fair-market-value consideration at the time of the transfer, or you can dispute whether the transferor owed tax at the time that the transfer occurred. The Vasilkioti illustrates that a court may vacate the derivate-tax assessment if the Canada Revenue Agency fails to adduce reliable evidence concerning the tax debts underlying the derivative-tax assessment. But the Vasilkioti case also illustrates that, where the transferor and transferee are spouses, the Canada Revenue Agency won’t bear the burden of proving the underlying tax debt unless the derivatively assessed taxpayer establishes that he or she couldn’t “easily access the necessary information to challenge an underlying assessment [from the tax-debtor spouse].” Your position will succeed only if it aligns with the governing legal principles and finds support in the available evidence. If the Canada Revenue Agency has derivatively assessed you for vicarious tax liability under section 160 of Canada’s Income Tax Act or section 325 of Canada’s Excise Tax Act, contact our expert Canadian tax-litigation lawyers. We’ll assess your case and advise on the best strategy for vacating the assessment and escaping your derivative-tax liability.
To challenge a notice of assessment under section 160 of the Income Tax Act or under section 325 of the Excise Tax Act, you must file a notice of objection within 90 days from the date on the derivative-tax assessment. If you fail to meet the 90-day deadline, you might qualify for an extension, but you must apply for the extension within one year and 90 days from the date on the assessment or confirmation.
A notice of objection begins the CRA’s administrative tax-dispute process, and the Canada Revenue Agency’s Appeals Division will assign an appeals officer to evaluate the merits of your objection. Alternatively, if you want to bypass the CRA’s Appeals Division and appeal directly to Tax Court, you may do so if the Appeals Division hasn’t rendered a decision within 90 days (or 180 days for GST/HST matters) from the date that you filed your objection. In either case, you must begin by first filing a notice of objection.
If the CRA’s appeals officer renders an unfavourable decision to your tax objection, you may continue the dispute by filing a notice of appeal to the Tax Court of Canada. You must appeal to the Tax Court of Canada within 90 days from the date on the notice of confirmation from the CRA’s Appeals Division. You may apply for an extension of time if you miss the 90-day deadline, but it’s typically more difficult to obtain an extension from the Tax Court of Canada than it is to obtain an extension from the CRA’s Appeals Division at the objection stage.
If you don’t exercise your objection or appeal rights within the statutory deadlines, you’ll be personally stuck with the vicarious-tax debt—even if the original tax debtor discharges the debt under bankruptcy.
Fortunately, Canadian taxpayers can typically avoid these problems through early engagement of an experienced Canadian tax-litigation lawyer. Speak to our Certified Specialist in Taxation Canadian tax lawyer today. Our experienced Canadian tax-litigation lawyers thoroughly understand derivative-tax assessments under section 160 of the Income Tax Act and section 325 of the Excise Tax Act, and we can ensure that you deliver a forceful, thorough, and cogent tax objection to the Canada Revenue Agency or tax appeal to the Tax Court of Canada.
FREQUENTLY ASKED QUESTIONS
I owe a large income-tax debt to the Canada Revenue Agency. I understand that, under Canadian tax law, a taxpayer and the taxpayer’s spouse are two distinct taxpayers. So, to protect my assets from CRA’s tax collectors, I plan on gifting all my property and investments to my spouse under the spousal-rollover provisions. This shouldn’t pose a problem, correct?
By gifting the property and assets while you owe income tax, you’ll thereby expose your spouse to a derivative-tax assessment under section 160 of Canada’s Income Tax Act. Section 160 is a tax collection tool, and it aims to thwart taxpayers who try to keep assets away from the Canada Revenue Agency’s tax collectors by transferring those assets to related parties—such as spouses. If you proceed with the proposed transfers to your spouse, section 160 allows the CRA’s tax collectors to pursue your spouse for your income-tax debts. Your spouse’s derivative-tax liability under section 160 is capped at the lower of the two amounts: (1) market value of the transferred property and (2) your income-tax debt at the time of the transfer.
I know that, after a certain period of time, certain tax matters become statute-barred, meaning that the Canada Revenue Agency can no longer issue a tax assessment after that period has expired. I suspect that I may be vulnerable to a derivative-tax assessment under section 160 of the Income Tax Act, but the transaction occurred several years ago. Doesn’t this mean that the derivative-tax assessment is now statute-barred, and that the CRA can no longer assess me for the vicarious-tax liability?
No. Unlike other types of tax assessments, a derivative-tax assessment under section 160 doesn’t become statute-barred and doesn’t contain a limitation period. So, the Canada Revenue Agency can assess you under section 160 for derivative tax liability years after the purported transfer. Vasilkioti v the King, 2024 TCC 101, illustrates, the Canada Revenue Agency’s tax collectors may raise the derivative-tax assessment at any time. In Vasilkioti, the CRA tax collector assessed the taxpayer for derivative tax about 7 years after the transfer had occurred and about 3 years after the taxpayer’s husband, the alleged tax debtor, had already passed away.
I recently received a notice of assessment for derivative-tax liability under section 160 of the Income Tax Act. The derivative-tax assessment relates to property and investments that I received from my ex-spouse during our divorce proceedings. I want to dispute the derivative-tax assessment. What should I do now?
To challenge a notice of assessment under section 160 of the Income Tax Act, you must file a notice of objection within 90 days from the date on the derivative-tax assessment. A notice of objection begins the CRA’s administrative tax-dispute process, and the Canada Revenue Agency’s Appeals Division will assign an appeals officer to evaluate the merits of your tax objection. Your tax objection will succeed only if it aligns with the governing legal principles and finds support in the available evidence. Our experienced Canadian tax-litigation lawyers thoroughly understand derivative-tax assessments under section 160 of the Income Tax Act and section 325 of the Excise Tax Act, and we can ensure that you deliver a forceful, thorough, and cogent tax objection to the Canada Revenue Agency or tax appeal to the Tax Court of Canada.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
