In Scott v The Queen, 2020 TCC 4, the Tax Court of Canada held that a transferee’s liability in a section 160 assessment was reduced where, after the assessment, the Minister of National Revenue (the “Minister”) cancelled a portion of the transferor’s liability for arrears interest.
Generally, section 160 of the Act prevents a taxpayer from avoiding collection by transferring property to certain parties. Section 160 applies where four conditions are met:
- the transferor is liable to pay an amount under the Act;
- the transferor transfers property to a transferee;
- the transferee is the transferor’s spouse or common-law partner, under 18 years of age or does not deal at arm’s length with the transferor; and
- the fair market value of the transferred property exceeds the fair market value of the consideration given by the transferee (the author will refer to the difference between the two amounts as the “Excess”).
If these conditions are met, paragraph 160(1)(e) provides that the transferee is jointly and severally liable with the transferor for the amounts owing by the transferor under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year, up to the Excess.
In Scott, the taxpayer’s brother transferred $224,500 of funds to the taxpayer in 2005 and 2006. The taxpayer and the Minister agreed that, on May 22, 2015, the taxpayer’s brother owed $233,835 under the Act in respect of the relevant years preceding the transfers (including arrears interest accrued after the transfers). Accordingly, on May 22, 2015, the Minister issued a section 160 assessment to the taxpayer for $224,500 in respect of his brother’s debts.
In February 2016, pursuant to the taxpayer relief provisions of the Act, the Minister cancelled the arrears interest owing by the taxpayer’s brother that had accrued between March 2009 to July 2013. The parties agreed that, of the $233,835 owing by the taxpayer’s brother on May 22, 2015, $149,350 pertained to arrears interest and that $50,303 of that interest had now been cancelled.
Among other things, Justice Hogan of the Tax Court had to determine whether the cancellation of interest reduced the brother’s debt for the purposes of the section 160 assessment to $183,532 (i.e. $233,835 less $50,303), thereby also reducing the taxpayer’s liability to $183,532.
The Minister argued that the cancellation of interest did not apply retroactively, so the brother’s liability for the purposes of the section 160 assessment against the taxpayer was still $233,835. The Minister granted the cancellation of interest after issuing the section 160 assessment.
Justice Hogan rejected the Minister’s position, noting that it could result in the taxpayer owing a greater amount than his brother. Justice Hogan reasoned that, since the liability under section 160 is joint and several, the transferee’s tax liability could not exceed the transferor’s tax liability. The provision makes the transferee jointly and severally liable with the transferor for all or a lesser part of the transferor’s liability. Accordingly, Justice Hogan held that the taxpayer’s liability under section 160 was reduced to $183,532.
This result is consistent with a purposive interpretation of section 160 and is certainly fair in the circumstances.