Mar 28, 2025
In March 2025, the Federal Court of Appeal delivered the judgment on the appeal of a decision of the Tax Court of Canada concerning a taxpayer’s tax liability derived from the tax debts of her late husband, pursuant to subsection 160(1) of the Income Tax Act.
Background – Derivative liability under subsection 160(1) of the Income Tax Act
The tax liability of the taxpayer’s late husband, Charles Csak, arose from partnership losses in the 1988-1991 tax years. In 1992 and 1993, Charles filed waivers of the normal reassessment period for the 1988 and 1989 tax years, which is three years after the original assessment for individual taxpayers, in order to claim the partnership losses. The strategy backfired as the CRA reassessed Charles and denied the losses. Thus, Charles, as part of a group appeal, appealed to the Tax Court and subsequently lost the case: Makuz v. The Queen, 2006 TCC 263 (Makuz).
Relevant to his wife’s appeal, Charles transferred a real property to his wife, Maria Csak, in 1993, shortly after their marriage. Charles then died in 2002, and in 2012, Maria was assessed for derivative tax liability for her late husband’s tax debts under subsection 160(1) of the Income Tax Act.
Subsection 160(1) provides that when a person transfers property to a non-arm’s length person for less than fair market value consideration, the transferee becomes jointly and severally liable for the tax debts of the transferor for the year of transfer and prior years. The liability is limited to the excess of the fair market value of the transferred property over the fair market value of the consideration given.
The issues before the Tax Court were:
- What was the consideration given by Maria to Charles for the transfer of the property?
- Were the reassessments of Maria for the 1988 and 1989 tax years statute-barred?
The underlying issues were:
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- In Makuz, the reassessments of Charles for the 1988 and 1989 tax years were held to be correct. Can Maria still raise the defence of statutory limitation for her own reassessments?
- Were the waivers of the normal reassessment period filed by Charles for the 1988 and 1989 tax years valid?
Love and care are not considerations
Maria and the CRA agreed that the fair market value of the property transferred was $950,000 at the time of the transfer. If there was consideration flowing from the taxpayer to her late husband in exchange for the transfer, her tax liability would be reduced by the fair market value of the consideration. Here, there was no evidence of any consideration given by Maria to Charles. She argued that the considerations were her agreement to the marriage, her love and affection for the husband, and her care for him (Charles was in his 80s and was sick).
The Tax Court rejected this argument, citing long-held jurisprudence that love and domestic services are not valid considerations in contract law. The marriage took place before the transfer, and the care took place after the transfer. These events were never referenced in any way as an exchange for anything. Therefore, the Tax Court ruled that the transfer was made without consideration.
This point was not appealed by the parties and so was not revisited by the Federal Court of Appeal.
The taxpayer assessed for derivative liability can challenge the underlying assessment
In Makuz, the reassessments of Charles for the 1988 and 1989 tax years were held to be correct. The CRA argued that Makuz precluded Maria from raising the defence of statutory limitation in her own case. The Tax Court disagreed, stating that the issue of correctness is distinct from the issue of statutory limitation.
In Makuz, Charles did not raise the issue of statutory limitation because he filed the waivers in order to seek reassessments. In Maria’s case, tax jurisprudence provides that a taxpayer subject to derivative liability is entitled to challenge the underlying assessment on which the derivative assessment is based. Therefore, Maria is not precluded from raising the defence of normal reassessment period, which is three years after the original assessment for individual taxpayers.
The Federal Court of Appeal upholds this holding of the Tax Court.
The waiver for the 1988 tax year was invalid
Before the Tax Court, Maria raised doubts about the authenticity of the waiver filed by Charles for the 1988 tax year. The Tax Court, while acknowledging her concerns regarding authenticity, found that the anomalies did not in and of itself invalidate the waiver.
The waiver was mailed to the CRA. Although it was in the physical file for Charles at the CRA, it was not stamped by the CRA’s mail room as to when it was delivered to the CRA. Hence, the Tax Court found that there was not enough evidence to conclude that the waiver was filed on time.
This finding was not appealed by the parties and so was not revisited by the Federal Court of Appeal.
The waiver for the 1989 tax year was valid – Filing a waiver for reassessment beyond the normal reassessment period is a “thing”
In contrast with the 1988 waiver, the waiver for the 1989 tax year was received by the CRA on May 31, 1993. Per subparagraph 152(4)(a)(ii) of the Income Tax Act, the CRA can reassess a tax year beyond the normal reassessment period if the taxpayer files a waiver within the normal reassessment period of that tax year. Again, for individual taxpayers, the normal reassessment period is three years after the original assessment.
In Charles’ case, the normal reassessment period for the 1989 tax year ended on May 30, 1993, which fell on a Sunday. The CRA applied section 26 of the Interpretation Act, which reads:
Where the time limited for the doing of a thing [emphasis added] expires or falls on a holiday, the thing [emphasis added] may be done on the day next following that is not a holiday.
The CRA argued the receipt of the waiver on the next day, May 31, which was not a holiday, was valid and thus, the reassessment for the 1989 tax year beyond the normal reassessment period was warranted.
In a long and convoluted reasoning that made many heads turn, the Tax Court essentially said that a waiver for this purpose is not a “thing.” The Tax Court equated “thing” under section 26 with a right. The Tax Court said that because a valid waiver does not grant the taxpayer the right to compel the CRA to reassess, filing the waiver is not “doing a thing.” Therefore, section 26 of the Interpretation Act does not apply. In other words, the normal reassessment period for the 1989 tax year expired on May 30, 1993, and the receipt of the waiver on May 31 was late.
The Federal Court of Appeal disagrees with this head-scratching opinion. “Thing” in the English version or “formalité” in the French version of section 26 both have a broad definition in the dictionary of each respective language. It is defined, in part, as an act, idea, utterance, or event. There is nothing suggesting a limitation of “thing” to only a right.
As a result, section 26 of the Interpretation Act applies to filing a waiver under subparagraph 152(4)(a)(ii) of the Income Tax Act. Consequently, the 1989 waiver was filed on time and the reassessment of the 1989 tax year beyond the normal reassessment period was warranted.
The final verdict
Closing a dispute that had lasted for more than 10 years, the Federal Court of Appeal ruled that Maria bears derivative liability under subsection 160(1) of the Income Tax Act for her late husband’s tax debts for the 1989 tax year. The 1988 tax year, on the other hand, was statute-barred. Her liability is up to the full fair market value of the property transferred because there was no consideration given.
Pro Tax Tip – Be careful when filing a waiver
The CRA can reassess taxpayers beyond the normal reassessment period only under certain circumstances, one of which is when the taxpayer files a waiver with the CRA. The taxpayer may choose to file the waiver if the taxpayer believes the reassessment will benefit him or her.
However, the taxpayer needs to be aware that the CRA is not obligated to reassess and that the reassessment, if the CRA decides to do so, may yield an adverse effect. It is important that the taxpayer consults with experienced Canadian tax lawyers so that the taxpayer clearly understands the implications of filing the waiver and getting the reassessment.
If the taxpayer indeed files the waiver, the taxpayer needs to do so properly and within the normal reassessment period. Past the normal reassessment period, the waiver will be invalid.
FAQ
I was transferred a property from a family member, and now the CRA is coming after me for that family member’s tax debts. What can I do?
Per subsection 160(1) of the Income Tax Act, you might be jointly and severally on the hook for the family member’s tax debts. You can challenge both the operation of subsection 160(1) and the underlying assessment of the transferor. For subsection 160(1), you can argue that the transfer was for consideration whose fair market value is equal to or greater than the fair market value of the property transferred. As well, any defence available to the transferor for the underlying assessments is available to you. You should consult with experienced Canadian tax lawyers to explore your strategy thoroughly.
The normal reassessment period is expiring soon and I want to file a waiver of the normal reassessment period. What should I do?
For the waiver of the normal reassessment period to be valid, you need to file it within the normal reassessment period, which is three or four years, depending on the type of taxpayer, after the original assessment. Section 26 of the Interpretation Act applies, so if the last day of the normal reassessment period falls on a holiday, it is extended to the next day that is not a holiday. Be sure to discuss the full implications of filing a tax waiver with a knowledgeable Canadian tax lawyer.
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.
