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
lkim@millerthomson.com
Thomas Ghag
Miller Thomson LLP, Vancouver
tghag@millerthomson.com