Section 160 of the Income Tax Act prevents a taxpayer from avoiding the payment of tax by transferring his/her property to certain persons or non-arm’s length entities that will allow the taxpayer to continue to control the property in question. The object and spirit of section 160 is to prevent a taxpayer from transferring his/her property to his/her spouse [or to a minor or non-arm’s length individual] to thwart the Minister’s efforts to collect the money which is owned to him.
Lack of knowledge of the transferor’s tax debt by the transferee is irrelevant (see Reagh v R, [2004] 3 C.T.C. 2336 (TCC) ). That is, the parties need not have any intention to avoid the tax debt, or even knowledge of the tax debt, for the transferee to be liable for tax under section 160.
The Tax Court of Canada in Vasilkioti v. The King (2024 TCC 101) analyzed the “knowledge” criteria for section 160 to apply and held that since the Minister could not adduce sufficient evidence to prove the tax liability of the transferor at the time of transfer, subsection 160(1) would not apply. Further, the Tax Court reiterated the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R 336 (at para. 87) and held that where the Act does not require supporting documentation, credible oral evidence is sufficient notwithstanding the absence of records. Also see Weinberger v. Minister of National Revenue (1964), 64 D.T.C. 5060 (Can. Ex. Ct.) Naka v. R. (1995), 95 D.T.C. 407 (T.C.C.), Page v. R. (1993), 95 D.T.C. 373 (T.C.C.)
In Vasilkioti v. The King, the transferee and the transferor were married for over 50 years. On July 4, 2012, the transferor transferred 50% interest in the property to the transferee. By notices of assessment dated October 6, 2014, the transferor was assessed for his 2007, 2009, 2010 and 2011 taxation years for a total amount of $72,391.59 (including interest and penalties) (the “Underlying Assessments”). The transferor shared with the transferee that he had been assessed by the CRA for an amount of approximately $72,000, which the transferee did not review further, and the transferee was the executor of the transferor’s estate.
The Minister argued that since the transferee had the ability to get information surrounding the tax debts of the transferor but decided to adduce no evidence to challenge the underlying assessments, the Tax Court should find that the underlying assessments were correct.
The Tax Court stressed on the transferee’s ability to challenge the underlying assessment and held that the fact that a taxpayer assessed under subsection 160(1) knew about the tax liability is irrelevant, as fairness requires that the taxpayer possess sufficient information to challenge the underlying assessment. Further, the Tax Court relied on the transferee’s credibility and reliability when reviewing evidence and held that oral testimony is valid (based on the Supreme Court’s decision in Hickman Motors Ltd.).
The decision is interesting because the government is trying hard to target strategies to avoid section 160 tax obligation (refer to the 2021 Federal Budget which introduced anti-avoidance rules in section 160), whereas this decision may provide taxpayer’s an option to circumvent the application of section 160 (on the basis that they could not challenge the underlying assessment for reasons that may be voluntary, e.g., ignorance of the transferor’s tax assessments). Further, the government introduced additional information gathering tool in the 2024 Federal Budget but the Tax Court upheld oral evidence and stressed on the reliability and credibility of the witness vis-à-vis written submission, receipts, and vouchers, etc. to support the taxpayer’s position.
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