Scenario: A small corporation has been reassessed by the Canada Revenue Agency (CRA) for income tax, but the owner missed the 90-day deadline (plus the one-year extension) to file a notice of objection. Normally, missing this deadline means the tax debt is final and unchallengeable by the corporation. Faced with an unpayable tax bill, the owner puts the corporation into bankruptcy. What happens next, and is there any way to dispute the tax debt now?
Section 160 – Liability for Transfers to Non-Arm’s-Length Parties
Generally, when a tax debtor transfers property to a related or non-arm’s-length recipient for less than fair market value, section 160 of the Income Tax Act (Canada) (ITA) allows CRA to pursue the recipient for the transferor’s tax debt. In effect, the recipient becomes liable for the tax debt up to the lesser of the value of the transferred asset (minus the consideration received by the transferor) and the amount of the tax debt. For example, if a corporation owing taxes paid a dividend or transferred an asset to its shareholder (a non-arm’s-length person) without equivalent consideration, CRA can generally assess the shareholder personally under section 160 for the corporation’s income tax arrears (to the extent of the undervalued transfer). The shareholder and the corporation are then jointly and severally liable for that amount.
In our scenario, once the corporation is bankrupt (and cannot pay its tax debt), CRA often turns to such derivative assessments. The business owner might receive a section 160 assessment holding them personally liable for the corporate tax debt, especially if they received any funds or assets from the company for little or no consideration.
Defending a Section 160 Assessment – Contesting the Tax Debt
Importantly, being assessed under section 160 gives the individual a fresh chance to dispute the underlying tax debt. The section 160 assessment is a separate assessment against the transferee (the owner), who has their own right to object and appeal. Canadian courts have confirmed that a person assessed under section 160 must have a full right of defence to challenge the assessment made against the person, including an attack on the primary corporate assessment on which the person’s assessment is based. In other words, even though the corporation missed its objection deadline, the transferee can still argue that the corporation did not actually owe the amount of tax in the first place.
When responding to a section 160 assessment, several defences can be raised, including (but not limited to):
- No Tax Debt or Lower Tax Debt: The original taxpayer (e.g. the corporation) did not owe the assessed taxes – meaning the underlying tax assessment was incorrect. This is effectively challenging the basis of the tax debt.
- Valid Consideration: The transfer in question was not a gift or below-value transfer (for example, it was repayment of a loan or the recipient paid fair market value), so section 160 should not apply.
- Overstated Value: The property’s value was lower than the CRA assumed, reducing the transferee’s liability.
If any of these succeed, the section 160 assessment can be reduced or eliminated. Notably, lack of knowledge of the tax debt is not a defence – liability under section 160 can apply even if the transferee was unaware of the tax owing.
Practical Takeaways
This strategy – letting the corporation go bankrupt and dealing with a section 160 assessment – is a last resort. It underscores a peculiar quirk of tax law: a related-party recipient can get their “day in court” on the original tax issue, even if the primary taxpayer lost that right. However, invoking this strategy is risky and can lead to personal liability. The better course is always to file timely objections to tax assessments to avoid such predicaments. If you do find yourself facing a section 160 assessment after a missed objection, seek professional tax advice.
