Principal Issues: Whether the amount of a section 160 assessment against a transferee of property is reduced by payments by the transferee to the transferor's company
Position: Possibly.
Reasons: See below.
October 18, 2011
Kitchener/Waterloo TSO HEADQUARTERS Appeals Division Income Tax Rulings Directorate Attention: Carolyn Kropf, Team Leader Richard Aronoff (613) 941-7239 2011-040837
Section 160 in Respect of the Transfer of a Residential Property
This is in response to the email from Robert Zwaag concerning the application of subsection 160(1) of the Income Tax Act (the "Act") which provides for tax liability arising from a non-arm's length transfer of property. At issue is whether the amount of the assessment against the transferee should be reduced.
The fact situation involves a taxpayer with an outstanding tax liability who transferred a residential property to his spouse. The spouse was assessed under subsection 160(1). She subsequently filed a notice of objection claiming that the amount of the assessment against her should be reduced by the sum of the amount of a cheque that she issued to her husband's corporation, of which he is the sole shareholder, and her income tax refund that she assigned to her husband or his corporation. The taxpayer's representative has indicated that the cheque is not recorded in the corporation's books and records. Furthermore, no evidence was provided to support the deposit of the tax refund by either the husband or his corporation and the deposition of these funds cannot be traced.
Under subsection 160(1) of the Act, a transferee, in receipt of property from a transferor with whom there is no arm's length relationship, is jointly and severally liable with the transferor for that person's tax liability. The amount of the transferee's liability is equal to the lesser of the fair market value of the property transferred less the consideration paid, and the transferor's total tax liability owing in the year of the transfer or any preceding year. The purpose of section 160 is to prevent a taxpayer from avoiding having to pay a tax liability by transferring property to non-arm's length persons.
In order to succeed, the spouse must produce evidence that she gave consideration for the transfer of the residential property. The transfer of monies to the corporation may involve an indirect transfer to the husband to the extent that it could have increased the value of his shares. However, in the absence of any evidence to support the claim, the issue need not be addressed. On the other hand, were the wife to produce evidence of consideration paid, the value of that consideration would require a formal valuation of the increase in the value of the shares.Should you have any questions or require additional information, please do not hesitate to telephone Richard Aronoff at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate
cc. Robert Zwaag
Appeals Division
Kitchener/Waterloo TSO