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Can You be Liable for Another Person’s Tax Debt?
Section 160 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1 (the “Act”), bestows on Canada Revenue Agency the ability to assess an individual for taxes owing by another taxpayer if the tax debtor transferred money or assets to the individual for less than fair market value. This is referred to as transferee liability and it applies to non-arm’s length transfers, such as those between spouses or a parent and child. The transferee can be liable for up to the lower of:
- The amount by which the value of the property transferred exceeds the value of the consideration paid for the property; and
- The total amount that the transferor tax debtor is liable under the Act in respect of the taxation year in which the transfer occurred or any preceding taxation year.
Transferee liability was at issue in the recently released Federal Court of Appeal decision, Hardtke v. The Queen, 2016 FCA 138. In that case, Dieter Hardtke, a tax debtor, transferred title to the matrimonial home to his wife, Elizabeth Hardtke, for $1 and the assumption of a $65,000 mortgage. Mrs. Hardtke was assessed pursuant to section 160 of the Act in the amount of $249,999, which was the fair market value of the property (i.e. $315,000) less the total consideration paid (i.e. $65,001).
On appeal, Mrs. Hardtke argued that she had an unregistered equitable interest in a resulting or constructive trust in the home that she relinquished at the time of the transfer, the value of which interest should be included in the calculation of the consideration paid by her. This argument was rejected by both the Tax Court of Canada and the Federal Court of Appeal.
Before the Federal Court of Appeal, Mrs. Hardtke also argued that section 160 requires that the transferor of the property be shown to have an intent to avoid the payment of taxes. The Court declined to consider this argument because it had not been raised at trial. It is unlikely that it would have been successful, however, since it is a well settled principle that section 160 assessments do not require any intention on the part of the transferor or the transferee.
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