If you are dealing with the knowledge that a tax debt is hanging over your head, considering various options to deal with it, and thinking that perhaps transferring assets is a safe bet, you need to read on. Such action can leave the person you transfer assets to liable for your tax debt, as outlined by Section 160 of the Income Tax Act.
With regard to transferring assets, Section 160 of the Income Tax Act states:
Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to…a person with whom the person was not dealing at arm’s length, the following rules apply:
- the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and the total of all amounts each of which is an amount that the transferor is liable to pay under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year…
What this means is that, if you transfer money or property to someone with whom you are not dealing at arm’s length, that person could be liable for your tax debt.
For example, if you have a tax debt of $50,000 for 2014, and in 2015 you give you spouse a property worth $20,000, for which he/she pays only $10,000, their liability will be the $10,000 shortfall in consideration paid for the property.
The transferee’s liability does not depend upon knowledge or intention. The recipient does not need to be aware of the tax debt to become liable. On that note, the transferee does not actually need to be aware either – as long as the tax debt exists, the recipient is liable.
When you know that you have a tax debt, one of the worst things you can do is transfer assets to a loved one – this may leave them dealing with your tax debt. Our best advice is to find a solution that actually deals with the tax debt, rather than trying to avoid it and hoping it will disappear.
Section 160 of the Income Tax Act is strictly enforced by the CRA, and attempting to conceal assets in an effort to avoid paying a tax debt may seem like a smart idea, but it may just end up transferring the debt.
For more information on the options available to deal with your tax debt, please contact Tax Solutions Canada today by calling 1-888-868-1400.