Section 160: 2020 Highlights

Taxpayers that have income tax liabilities cannot avoid payment by transferring property to non-arm’s-length parties: the CRA may assess both the taxpayer and the transferee so that they are jointly and severally, or solidarily, liable for the tax. Such an assessment can be up to the amount by which the FMV of the property at the time of transfer exceeds the FMV at that time of the consideration given for the property. Of the ten TCC decisions on section 160 in 2020, three are of particular interest.

Dividends = No Consideration

In Valovic (2020 TCC 101), a husband and wife received a combination of employment income, business income, and dividends from Ivan’s Electric Limited at a time when it had income tax owing. The CRA assessed both spouses under section 160 on account of the dividend payments, and they appealed the assessment on the basis that they provided consideration for the dividends.

In rejecting their argument, the TCC referred to a number of prior TCC and FCA decisions where taxpayers unsuccessfully made the same argument. Such decisions highlight the principle that a dividend is related to shareholding and not to any consideration the shareholder might have provided. Notwithstanding one outlier decision accepting the consideration argument (see Davis et al. v. Canada, [1994] 2 CTC 2033 (TCC)), the TCC held that section 160 applied so that the taxpayers were jointly and severally liable with the company for its tax debts.

Determining the FMV

In Mamdani Family Trust (2020 TCC 93), the TCC considered the applicable time for determining the FMV of transferred property under section 160. In that case, Global Equity Fund Ltd. paid dividends to its sole shareholder, the Mamdani Family Trust, at a time when it owed income tax. The CRA assessed the trust under section 160.

The trust argued that the determination of the FMV of a dividend should be based on the assumption that a corporation may sell a stream of taxable dividend income to an arm’s-length shareholder. In this situation, the FMV of a dividend would need to reflect the tax on the dividend in the shareholder’s hands. The TCC rejected this argument, and held that the FMV must be determined with reference to the amount that the CRA could have seized from the transferor had there been no transfer. The TCC also emphasized that section 160 does not result in double taxation, because it is not a taxing or charging provision but rather a tax collection provision.

This decision suggests that a degree of caution is appropriate when owner-managers think of paying themselves dividends (as opposed to salary) to take advantage of favourable tax treatment.

The Underlying Assessment

In 1455257 Ontario Inc. (2020 TCC 64), the TCC held that the party challenging the section 160 assessment has the burden of proving that the underlying assessment is incorrect. In this case, the TCC rejected the appellant’s argument that the CRA should have applied the transferor corporation’s unused non-capital losses to the relevant taxation year, even though there was no request to do so. Applying the unused losses in this way would have reduced the transferor’s tax liability and therefore reduced the amount subject to the section 160 assessment.

Other Decisions

Other cases considered the non-arm’s-length requirement (Dreger v. The Queen, 2020 TCC 25 and Gentile Holdings Ltd. v. The Queen, 2020 TCC 29), the meaning of a transfer of property (White v. The Queen, 2020 TCC 22), and how interest charges that were forgiven should affect the assessment (Scott v. The Queen, 2020 TCC 4).

Lesley Kim
Miller Thomson LLP, Regina

Thomas Ghag
Miller Thomson LLP, Vancouver

Canadian Tax Focus
Volume 11, Number 1, February 2021
©2021, Canadian Tax Foundation