A KRP Case Study: Section 160 of the Income Tax Act and why proper documentation matters

Many aspects of the Income Tax Act are difficult for taxpayers to understand and navigate, but Section 160 is perhaps one of the most obscure. In fact, most taxpayers are not aware that this section exists, let alone do they understand its full implications.

That’s because Section 160  gives the Canada Revenue Agency (CRA) broad powers to collect tax where an individual  who otherwise owes money to the tax department transfers property either directly or indirectly to a spouse,  common law partner or a person to whom he or she is not dealing at arm’s length.

If you owe money to the CRA and have transferred assets into the name of a loved one for any reason (one of the most common being to protect oneself from creditors, perhaps on the advice of uninformed lawyers and accountants) then you might be disappointed.  If you are the person who received the asset, then you should seek professional advice.

Often with the guidance of professionals, taxpayers who own unincorporated businesses or who are members of a partnership will transfer their portion of a principal residence or other valuable  assets to their spouse for “love and affection” for creditor-proofing purposes.

Under Section 160, CRA can assess the recipient spouse for the lessor of:

• The tax debt owing by the transferor, the husband and
• The difference between the fair market value of the transferred property and the consideration received

Consider this example:  A husband owes $50,000 to CRA and he transfers half of his interest in a condo to his wife worth $125,000 for no consideration (the fair market value of the condo is $250,000).

Under Section 160, the CRA can assess the wife for the $50,000 tax debt owed by the husband.

A similar situation happened with a taxpayer who was referred to our firm not long ago.

The taxpayer had a significant personal tax liability to the CRA.   At that time, the taxpayer transferred his half interest in his matrimonial home to his spouse.  CRA assessed his spouse under Section 160 as the husband effectively transferred his  equity of the house to his spouse.

CRA did a market valuation at the time of the transfer and determined that the value of the matrimonial home was $190,000, with mortgages totalling $135,000.

From documentation provided to us, the taxpayer was able to remortgage the property to $185,000.  Out of the mortgage proceeds, CRA was paid $40,000 through a previously issued garnishment order.

CRA further demanded an extra $27,500, which constituted half the difference between the fair market value of $190,000 and the original $135,000 mortgage.  The property was transferred to his wife on the same day they refinanced it.

We submitted an appeal and argued that the transfer actually occurred after the refinancing had taken place, so in actual fact after the payment of legal and brokerage fees, the total amount of equity transferred over to the spouse was just over $1,500, not the $55,000 CRA had originally asserted in their assessment under ITA 160.  CRA accepted our argument as the documentation provided clearly showed that the refinancing took place on the property registered in the name of both husband and wife prior to the transfer.

Accordingly, CRA assessed the transferee spouse for $750, representing the husband’s equity in the matrimonial home and saved the taxpayer an additional $27,000.

The moral of this story is if you’re planning to appeal a tax assessment, make sure you have documentation that supports the position being taken.  In this case, the taxpayer had all of the relevant documentation to win the appeal.

Section 160 is complex; taxpayers are well advised to seek professional help as soon they receive an assessment or reassessment to allow time to file a notice of objection prior to the expiry of the 90 day appeal period.

Better yet, if you are contemplating a business or financial transaction no matter how innocuous it might seem, run it by your professional advisors first to avoid any potential pitfalls or traps.

Hartley Cohen,  CFP, CPA, CA (CPA Illinois)

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