Disputing a Section 160 or Section 325 Assessment
Taxpayers with a tax debt they cannot pay may, for example, transfer property to a family member with the expectation that Canada Revenue Agency (CRA) cannot seize that property. However, sections 160 of the Income Tax Act & 325 of the Excise Tax Act exist to counter this behaviour. Pursuant to the legislation, the transferee can be forced to pay tax debts if they received property, for less than fair-market value, from someone who owes tax.
For example, if a husband with a tax debt transfers the title of the family home to his wife, the wife could be forced to pay the husband’s tax debt. Or if a father gifts property or money to a child while still owing taxes, the child could be held liable for the father’s tax debt.
Transfer for Less than Fair-Market Value Consideration
For CRA to apply a section 160 or 325 assessment the transfer must be for less than fair-market value to a spouse or common law partner, a person 18 or younger or a non-arm’s length person. The transferee will be liable for the transferor’s tax debt up to the difference between fair-market value and the consideration exchanged. So, for example, if a husband transfers a $400,000 property to his wife for $20,000 and the tax debt is $100,000, CRA may assess the wife for $80,000.
The Queen v Livingston, 2008 FCA 89 (CanLII)
The analysis in The Queen v Livingston, 2008 FCA 89 (CanLII), concerning section 160, is commonly applied by the Tax Court of Canada. In Livingston, at paragraph 17, the Federal Court of Appeal confirmed the four step test to determine the validity of a section 160 assessment:
1) the transferor must be liable to pay tax under the Act at the time of the transfer;
2) there must be a transfer of property either directly or indirectly by means of a trust or by any other means whatever;
3) the transferee must be someone with whom the transferor was not dealing at arm’s length:
i. 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;
ii. a person who was under 18 years of age at the time of transfer; or
iii. a person with whom the transferor was not dealing at arm’s length; and
4) the fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee.
Defending a Section 160/325 Assessment
A taxpayer can defend against a section 160 or 325 assessment by:
a) asserting that the transfer of property was at arm’s length; or
b) asserting that adequate consideration or fair-market value was paid for the property.
Also, an effort should be made to dispute the underlying tax liability and assessment(s) if possible. If the original tax debt of the transferor is successfully challenged by a Tax Lawyer, the related section 160/325 assessment will be impacted accordingly.
However, as outlined here, bankruptcy of the original tax debtor will not extinguish the liability of the section 160 or 325 assessment recipient (the transferee).
Dividends and Section 160/325 Liability
The declaration and paying of dividends may prompt a future section 160 or 325 assessment if the corporation has a tax debt. This may present a particular risk for small corporations and their shareholders, especially if there is no guarantee all involved parties are diligent with the corporation’s tax matters.
Shareholders can be held liable for corporate tax debts if they received a dividend from a corporation that owes tax and CRA has been unable to collect from the corporation. According to case law, a dividend is a return on investment and not consideration, even if the recipient of the dividend believed the amount to be compensation for their work for the corporation. The liability is up to the amount of the dividend. In contrast, salary is deemed consideration and does not attract similar section 160 or 325 liability.
In Neuman v. M.N.R., 1998 CanLII 826 (SCC),  1 SCR 770, the Supreme Court of Canada stated at paragraph 57:
a dividend is a payment which is related by way of entitlement to one’s capital or share interest in the corporation and not to any other consideration. Thus, the quantum of one’s contribution to a company, and any dividends received from that corporation, are mutually independent of one another.
For example, CRA may assess a taxpayer for the tax debt of a corporation under section 160 or 325 on the basis that the corporation paid the taxpayer during the period the tax debt arose. CRA may assume, for assessment purposes, that the payment received was not in exchange for services provided to the corporation. In this example, to dispute CRA’s assumption, the taxpayer will have to prove that the amount received was salary for work for the corporation. However, if payment is by way of dividend, CRA’s position will be that the law considers a dividend to be a return on investment and not consideration for services. Accordingly, the taxpayer may be assessed for the tax debt of the corporation up to the amount of the dividend(s).
Paul v. the Queen, 1998 CanLII 461 (TCC)
In Paul v. the Queen, 1998 CanLII 461 (TCC), the shareholders were assessed for the tax debt of their corporation pursuant to section 160 of the Income Tax Act. During the period at issue dividends were issued to the shareholders. The Tax Court (referencing the key decision in Algoa Trust et al. v. The Queen, 93 DTC 405) stated at paragraph 7, ‘[s]hareholders receive dividends solely because of the right attributed to their shares, so that no consideration can be said to be given by them therefor…Accordingly, no consideration passed from either taxpayer to [the corporation] in respect of the dividends paid to them.”
Consequently, at paragraph 14, the “Minister correctly assessed the Appellants in accordance with section 160 of the Act, as the Company transferred the Property to the Appellant’s for no, or inadequate, consideration at a time when the company was liabile to pay an amount under the Act.”
How can we Help?
A Tax Lawyer from SpenceDrake Tax Law will devise tax solutions to challenge a section 160 or 325 assessment. A section 160 or 325 assessment can be successfully challenged under the proper circumstances with a Notice of Objection and/or an appeal to the Tax Court of Canada. If you face an assessment it is important to seek the advice of a Tax Lawyer with in-depth knowledge of the applicable and sometimes complex law.
SpenceDrake Tax Law
Canada v. Livingston, 2008 FCA 89, 375 NR 309,  3 CTC 230,  CarswellNat 564, FCJ No 360 (QL),  DTC 6233
Paul v. The Queen,  1 CTC 2713, 53 DTC 99
Neuman v. M.N.R., 159 DLR (4th) 1, 225 NR 190,  3 CTC 177, 52 DTC 6297