Feb 25, 2025
Introduction: Derivative Tax Liability & Section 160 of Canada’s Income Tax Act
The derivative tax rule in section 160 of Canada’s Income Tax Act 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. The person who received property from the tax debtor becomes jointly and severally liable for the tax debtor’s income tax debts.
The Federal Court of Appeal’s decision in Enns v The King, 2025 FCA 14, illustrates that if you inherit an RRSP from a deceased person with outstanding income tax debts, the CRA’s tax collectors may use the derivative tax rules in section 160 to stalk you for the deceased’s income tax debts.
But Enns case reveals another common strategy for avoiding derivative tax liability under section 160: demonstrating that, at the time of the transfer, the transferor and transferee weren’t in one of the relationships that triggers the derivative tax rules.
In particular, the appellate court confirmed that a widow isn’t a “spouse” for the purposes of section 160 in Canada’s Income Tax Act. As a result, the derivative tax rule in section 160 didn’t apply to a transfer of property that the widow inherited after her husband’s death.
After reviewing the mechanics of section 160 of Canada’s Income Tax Act, this article analyzes the Enns decision. It then concludes by providing pro tax tips from our esteemed Canadian tax litigation lawyers on challenging derivative tax assessments under section 160.
The Mechanics of Section 160 of Canada’s Income Tax Act
The derivative-tax-liability rule in section 160 applies if 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 applies to any 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 from a friend or relative with tax debts, a monetary gift from a spouse with tax debts, etc.
If a transfer triggers section 160 of Canada’s Income Tax Act, the transferor and the recipient both become “jointly and severally” liable for the transferor’s tax debt. This means that the recipient is independently liable to pay whatever amount of tax debt the transferor owed at the time of the transfer.
As a result, the Canada Revenue Agency’s tax collectors can now chase both the original tax debtor and the derivative tax debtor for those tax debts. 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, 1996 CanLII 3932 (FCA)).
Granted, there are a few limits to the transferee’s derivative tax liability. First, the transferee’s derivative tax liability is capped at the fair market value of the transferred property. Second, the transferee’s liability is also offset by the amount of any consideration that the transferee provided in exchange for the property.
Suppose, for example, that a corporation owes $1 million in tax debt to the CRA. The corporation pays a $50,000 dividend to a shareholder, and it pays $50,000 in salary to an employee. The shareholder’s derivative liability under section 160 is $50,000—i.e., the lesser of the corporation’s tax debts and the value of the dividend. The employee, however, doesn’t trigger any derivative tax liability. This is because the employee provided consideration for the $50,000 salary—namely, the employee’s services.
Still, 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.
Canada’s Excise Tax Act contains a similar derivative liability rule for GST/HST. Section 325 of Canada’s Excise Tax Act permits the CRA’s tax collectors to assess derivative liability for GST/HST debts. So, while section 160 of the Income Tax Act results in derivative tax liability for transfers by a person with income tax debts, section 325 of the Excise Tax Act results in derivative tax liability for transfers by a person with GST/HST debts.
Enns v Canada: The Facts of the Case
The case concerned an RRSP that the taxpayer, Marlene Enns, had inherited after her husband’s death.
Before his death, Peter Enns, Marlene’s husband, was the sole annuitant of a registered retirement savings plan (RRSP), and he had designated Marlene as the sole beneficiary of that RRSP.
Peter died on May 22, 2013. Upon his death, Peter had income tax debts of over $145,000. Shortly after Peter’s death, Marlene received a payout of $102,789.52 from his RRSP.
As a result, on April 12, 2017, almost four years after Peter’s death, a CRA tax collector assessed Marlene for $102,789.52 in derivative-tax liability under section 160 of Canada’s Income Tax Act. In other words, the Canada Revenue Agency’s tax collectors wanted Marlene to pay derivative tax liability that equalled the amount that she had received from Peter’s RRSP.
In response, Marlene’s Canadian tax litigation lawyer disputed the derivative tax assessment on Marlene’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.
The Tax Court of Canada’s Decision: Enns v Canada, 2023 TCC 28
During the hearing before the Tax Court of Canada, the tax litigants agreed that Marlene’s husband owed over $145,000 in income tax debts at the time that Marlene inherited his RRSP holdings, that the $102,789.52 RRSP payout constituted a transfer of property to Marlene, and that Marlene provided no consideration to her late husband for the RRSP payout or for designating her as the beneficiary of his RRSP.
The sole issue was whether Marlene was still Peter’s “spouse” at the time that Marlene had received the $102,789.52 RRSP payout. Put differently, the question before the court was: Does the term “spouse” in section 160 of Canada’s Income Tax Act include the tax debtor’s widow or widower?
Marlene’s Canadian tax litigation lawyer argued that, for the purposes of section 160 of Canada’s Income Tax Act, the term “spouse” does not include a widow or widower. Because Marlene was not Peter’s “spouse” when she received the RRSP payout, she cannot face derivative tax liability under section 160.
In support of this argument, Marlene’s lawyer cited the Tax Court of Canada’s previous decision in Kiperchuk v R, 2013 TCC 60, in which the court vacated a derivative tax assessment after considering the meaning of “spouse” in section 160 and concluding that “the status of marriage is ended by death.”
In response, the CRA’s Canadian tax lawyer pointed to another Tax Court decision, Kuchta v R, 2015 TCC 289, in which the court reached the opposite conclusion, holding that, for the purposes of section 160, a “spouse” included a widow or widower.
Faced with these two seemingly contrary judicial precedents, the Tax Court of Canada ultimately adopted the interpretation in the Kuchta decision. The court opted for the Kuchta interpretation because the reasoning in Kuchta had more explicitly and faithfully applied the principles of statutory interpretation that the Supreme Court of Canada endorsed in Canada Trustco Mortgage Co v R, 2005 SCC 54.
Moreover, the court noted that, in Kiperchuk, the parties had not explicitly raised the question of whether a “spouse” included a widow or widower. The Tax Court of Canada, therefore, concluded that Marlene did not cease to be a “spouse” for the purposes of section 160.
To that end, the court dismissed Marlene’s tax appeal and upheld the CRA’s section 160 assessment, meaning that Marlene remained on the hook for over $100,000 in derivative tax liability.
The Federal Court of Appeal’s Decision: Enns v Canada, 2025 FCA 14
Marlene’s Canadian tax litigation lawyer appealed the Tax Court of Canada’s decision to Canada’s Federal Court of Appeal.
As part of its preliminary analysis, the Federal Court of Appeal found that Peter Enns’s $102,789.52 RRSP had indeed been transferred directly to Marlene Enns. In other words, the RRSP assets didn’t pass through Peter Enns’s estate.
Under provincial succession law, an RRSP doesn’t form part of the deceased’s estate; it devolves directly to the designated beneficiary. This meant that, upon Peter’s death, Peter’s RRSP was transferred directly to Marlene. This transfer satisfied three of the four conditions in section 160 of Canada’s Income Tax Act: A tax debtor’s property had been transferred to another party who provided no consideration in return.
In light of this preliminary finding, the appellate court concluded that Marlene’s tax appeal turned on a single question: At the time that Marlene Enns received the $102,789.52 payout from Peter Enns’s RRSP, was Marlene still Peter’s “spouse”? If so, then section 160 applied, and Marlene would remain on the hook for the $102,789.52 in derivative tax liability. If not, then section 160 didn’t apply, and Marlene wasn’t liable to pay derivative tax.
The Federal Court of Appeal ultimately concluded that Marlene wasn’t Peter’s “spouse” at the time that she received Peter’s RRSP. Applying the textual, contextual, and purposive analysis that the Supreme Court of Canada endorsed in Canada Trustco Mortgage Co v R, 2005 SCC 54, the Federal Court of Appeal held that, for the purposes of section 160 of the Income Tax Act, a “spouse” doesn’t include a widow or widower.
The appellate court reasoned that, according to its ordinary meaning, as reflected in both law dictionaries and standard English dictionaries, the term “spouse” refers to a married person, and since marriage ends on death, the survivor ceases to be the “spouse” of the deceased.
In the Kuchta decision, the Tax Court of Canada considered the colloquial use of the word “spouse” in conversations, obituaries, and newspaper articles, and the court found that these sources often used the term “spouse” when referring to a widow or widower.
According to the appellate court, this colloquial sense of “spouse” was untenable for the purposes of section 160 of the Income Tax Act. That’s because section 160 also applies to transfers between common-law partners, and the Income Tax Act’s definition of “common-law partner” indicates that a common-law partnership ends on death.
So, if the meaning of “spouse” includes a widow or widower, then section 160 would treat married couples and common-law partners differently—in particular, imposing derivative tax liability in cases like Marlene’s yet having no application in similar situations involving common-law partners. The appellate court found no indication that Canada’s Parliament sought different outcomes for married couples, on the one hand, and common-law partners, on the other.
Finally, when analyzing the purpose of section 160 of the Income Tax Act, the Federal Court of Appeal observed that the provision imposes derivative tax liability based on the fair market value of the transferred property, and in Marlene’s case, the section 160 assessment was for the full amount of the RRSP—that is, $102,789.52.
The problem is that if she withdrew the full RRSP amount to pay off the derivative tax liability, then she’d need to report the entire $102,789.52 RRSP as taxable income, which means that she’d incur a significant tax bill for the year in which she withdrew the RRSP funds. Parliament couldn’t have intended this result, reasoned the appellate court:
“Not only will she have to pay the $102,789.52 to satisfy the section 160 assessment, but she will also have to pay the taxes based on adding the $102,789.52 to her income. It is far from clear that Parliament would have intended this result following the death of a person’s partner.” [para 58].
The appellate court noted that this perverse result stemmed from misinterpreting the word “spouse” by straying from its “legal and ordinary meaning” and relying on its colloquial use:
“The tax consequence, as set out above, when an RRSP is transferred to a designated beneficiary who was the spouse of the deceased immediately before [that person’s] death, could also explain why the legal and ordinary meaning of “spouse” is the correct interpretation of this word for the purposes of paragraph 160(1)(a) of the Act.” [para 59].
The Federal Court of Appeal therefore decided that section 160 didn’t apply to Marlene, allowed her appeal, set aside the Tax Court’s previous decision, and vacated the section 160 assessment, thereby cancelling over $100,000 in derivative-tax liability.
Pro Tax Tips: The Lessons and Limits of the Enns Decision & How to Combat Derivative Tax Assessments under Section 160 of the Income Tax Act or Section 325 of the Excise Tax Act
In rendering the Enns decision, the Federal Court of Appeal provided some much-needed clarity by resolving the Tax Court of Canada’s previously conflicting jurisprudence on the meaning of “spouse.”
We can now say with certainty that, for the purposes of the derivative tax rule in section 160 of the Income Tax Act, a “spouse” does not refer to a widow or widower. Moreover, although the Federal Court of Appeal’s Enns decision dealt with the derivative tax rule in section 160 of the Income Tax Act, the decision should apply with equal effect to the analogous provisions concerning GST/HST debts in section 325 of Canada’s Excise Tax Act.
The Enns decision does come with limits, however. It doesn’t serve as blanket relief for all widows and widowers. The timing of the transfer remains a key factor. In Enns, the widow received her husband’s RRSP proceeds after his death. The Federal Court of Appeal held that the term “spouse” in section 160 doesn’t refer to a widow. So, the transfer occurred when the recipient was no longer a “spouse.” As a result, the derivative tax rule in section 160 didn’t apply.
But this wouldn’t hold true if the taxpayer’s husband had transferred the property to her immediately before his death. In that situation, the transfer would occur while both individuals were still alive and married, and the recipient would still be a “spouse” for the purposes of section 160.
An interesting question that the appellate court didn’t consider was whether the designation of the RRSP beneficiary was itself a “transfer” for the purposes of section 160. The language of section 160 covers situations where a tax debtor “transferred property, either directly or indirectly, by means of a trust or by any other means whatever.”
Moreover, subsection 248(1) of Canada’s Income Tax Act defines “property” as including “a right of any kind whatever.” So, one might argue that, by designating an RRSP beneficiary, the RRSP holder thereby transferred “indirectly or by any means whatever” to the beneficiary the right to receive the RRSP proceeds upon the holder’s death. If this line of reasoning holds weight, it undermines the Enns decision. This is because the beneficiary designation occurs while both spouses are still alive.
That said, our expert Canadian tax lawyers have thoroughly analyzed this beneficiary-designation argument and concluded that it likely shouldn’t undermine the appellate court’s reasoning in Enns.
First, the designation of a beneficiary likely isn’t a “transfer” in the sense required by the derivative tax rules in section 160 of Canada’s Income Tax Act or in section 325 of Canada’s Excise Tax Act. Second, even if the designation constitutes a transfer, it’s likely not a transfer of “property” as contemplated by Canada’s tax legislation. Our experienced Canadian tax lawyers thoroughly understand the nuances of derivative tax assessments under section 160 of the Income Tax Act and section 325 of the 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 Enns case reveals another common strategy: demonstrating that the transferor and transferee weren’t in one of the relationships that trigger the derivative tax rules. Still, regardless of the strategy you employ, your defence will succeed only if it accords with the governing legal principles and with the available evidence.
If the Canada Revenue Agency’s tax collectors have 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, speak to our expert Canadian tax lawyers today. We’ll assess your case and formulate a strategy that maximizes your chances of vacating the assessment and escaping your derivative tax liability.
Don’t delay. You must file a notice of objection within 90 days from the date that appears on the derivative tax assessment. If you don’t exercise your objection or appeal rights within the statutory deadlines, you’ll remain personally on the hook for the inherited tax debt—even if the primary tax debtor discharges the original debt under bankruptcy.
Fortunately, Canadian taxpayers can typically avoid these problems through early engagement of a skilled Canadian tax litigation lawyer. Speak to our Certified Specialist in Taxation Canadian tax lawyer today. Our experienced Canadian tax litigation lawyers will forcefully, thoroughly, and cogently dispute your derivative tax assessment by means of a tax objection to the Canada Revenue Agency or a tax appeal to the Tax Court of Canada.
FREQUENTLY ASKED QUESTIONS
I owe income tax debts and GST/HST debts to the Canada Revenue Agency. I understand that, under Canadian tax law, a taxpayer and the taxpayer’s spouse are two distinct taxpayers. I want to protect my assets from CRA’s tax collectors by transferring all my cash and investments to my spouse under the spousal rollover provisions. Will this cause any problems?
By transferring your cash and investments to your spouse while you owe income tax debts and GST/HST debts, you’ll thereby expose your spouse to derivative tax assessments under section 160 of Canada’s Income Tax Act and under section 325 of Canada’s Excise Tax Act. These tax-collection rules aim to thwart taxpayers who try to keep assets away from the CRA’s tax collectors by transferring those assets to related parties—such as spouses.
If you proceed with the proposed transfers to your spouse, the derivative tax rules allow the CRA’s tax collectors to pursue your spouse for your income tax and GST/HST debts. Your spouse’s derivative tax liability will be capped at the lower of two amounts: (1) the market value of the transferred property and (2) your tax debts at the time of the transfer.
I recently read the Federal Court of Appeal’s decision in Enns v The King, 2025 FCA 14. The court concluded that for the purposes of the derivative tax rule in section 160 of the Income Tax Act, a “spouse” does not refer to a widow or widower. Does this mean that the Canada Revenue Agency’s tax collectors can never assess a widow or widower for derivative-tax liability under section 160 of the Income Tax Act?
The Enns decision doesn’t serve as blanket relief for all widows and widowers. The timing of the transfer remains a key factor. In Enns, the widow received her husband’s RRSP proceeds after his death. The Federal Court of Appeal held that the term “spouse” in section 160 doesn’t refer to a widow. So, the transfer occurred when the recipient was no longer a “spouse.” As a result, the derivative tax rule in section 160 didn’t apply.
But this wouldn’t hold true if the taxpayer’s husband had transferred the property to her immediately before his death. In that situation, the transfer would occur while both individuals were still alive and married, and the recipient would still be a “spouse” and therefore exposed to a derivative tax assessment under section 160.
My understanding is that, after a certain period of time, certain tax issues become statute-barred, meaning that the Canada Revenue Agency can no longer issue a tax assessment after that statute-barred period has expired. I believe that I may be vulnerable to a derivative tax assessment under section 160 of the Income Tax Act, but the transaction occurred about 5 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 vicarious tax liability?
No. Unlike other types of tax assessments, a derivative tax assessment under section 160 of the Income Tax Act doesn’t become statute-barred and doesn’t contain a limitation period. So, even many years after the impugned transfer, the CRA’s tax collectors can assess you for derivative tax liability under section 160.
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 assets that I inherited when my spouse passed away. I want to dispute the derivative tax assessment. What should I do now?
Speak to our expert Canadian tax lawyers today. Don’t delay. You must file a notice of objection within 90 days from the date on the derivative tax assessment. If you don’t exercise your objection or appeal rights within the statutory deadlines, you’ll remain personally on the hook for the inherited tax debt—even if the primary tax debtor discharges the original debt under bankruptcy.
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 Enns case reveals another common strategy: demonstrating that the transferor and transferee weren’t in one of the relationships that trigger the derivative tax rules. Still, regardless of the strategy you employ, your defence will succeed only if it accords with the governing legal principles and with the available evidence.
Our experienced Canadian tax litigation lawyers will assess your case and formulate a strategy that maximizes your chances of vacating the assessment and escaping your derivative tax liability. We’ll then forcefully, thoroughly, and cogently dispute your derivative tax assessment by means of a tax objection to the Canada Revenue Agency or a 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.
