Tax Court finds that deposits into a joint bank account do not in and of itself constitute transfers of property for third-party liability assessments

In White v The Queen[1], the Tax Court allowed Mrs. White’s appeal, holding that the deposits of funds by Mr. White, a “tax debtor”, into a joint bank account held by him and Mrs. White (the “Joint Bank Account”) did not constitute transfers of property, as defined by section 160 of the Income Tax Act (“ITA”) and section 325 of the Excise Tax Act (“ETA”). Based on the Court’s findings, the transfers of property only occurred when funds were moved from the Joint Bank Account to an account held exclusively by Mrs. White, or when they were used to make mortgage payments in relation to a property held solely by Mrs. White.

The facts in this appeal resemble the facts in many other third-party liability cases. Mr. White was the owner of a small logging company along with his brother. In 2004, the company started to experience financial difficulties because of the weakness in the British Columbia forestry industry and a government-mandated reduction in cutting rights. In 2006, the business was shut down while owing GST and source deductions on salaries paid to employees. As a director, Mr. White was then held jointly and severally liable for the company’s tax debt, pursuant to subsection 323(1) of the ETA and section 227.1 of the ITA (the “Director’s Liability Assessments”).

Following the collapse of his company, Mr. White was able to find full-time employment and, between March 15, 2013 and March 26, 2014, deposited $89,806.72 in funds into the Joint Bank Account. At that time, Mr. White owed $49,962.45 of GST and $90,886.35 in source deductions resulting from the Director’s Liability Assessments.

The Minister assessed Mrs. White under section 160 of the ITA and section 325 of the ETA for all of the amounts deposited by Mr. White into the Joint Bank Account. In the Tax Court appeal filed by Mrs. White, the Crown argued that the transfer of property from Mr. White to Mrs. White occurred at the time that Mr. White deposited his salary into the Joint Bank Account, while Mrs. White argued that such transfer did not occur because Mr. White still retained control over those amounts.

Relying on the Exchequer Court decision in Fasken Estate v MNR[2], the Court found that the mere placing of funds into a joint bank account does not constitute a transfer. The Court thus found that Mr. White did not divest himself of the funds when the deposits were made into the Joint Bank Account, as he still had access to the deposited funds.

The Court noted at paragraph 29 that one of the purposes of subsection 325(1) of the ETA, which has the same purpose as subsection 160(1) of the ITA, is to “prevent the thwarting of the Minister’s efforts to collect the tax that is owed to her”. On the specific facts of the case, Mr. White did not defeat or in any way hinder the Minister’s efforts to collect any tax he owed by transferring funds into the Joint Bank Account, as, until withdrawn by the Appellant, they could have been garnisheed by the Minster at any time to satisfy Mr. White’s tax liability.

The Court’s conclusion is consistent with the prior decisions in White v The Queen[3] (where funds deposited by the husband into a joint bank account held with his wife were only considered transfers of property for section 160 purposes when they were used to pay off the mortgage on a home owned solely by the wife) and Yates v Canada[4],  (where the husband removed his name off the joint bank account). In both cases, a transfer of property was held not to have occurred when the deposits were made into the joint bank account.

As noted by the Court, the Crown admitted that the CRA did not look at the withdrawals made from the Joint Bank Account; rather, the CRA considered all of the deposits into the Joint Bank Account to be transfers of property and issued the third party liability assessments on that basis.

Based on the Court’s reconciliation of the transfers and payments from the Joint Bank Account, the assessment under section 160 of the ITA was vacated while the assessment issued under section 325 of the ETA was varied to limit the assessed amount in accordance with the Court’s findings.

The law, as endorsed by the Tax Court in White v The Queen, mandates that the CRA must take one further step when proposing to issue third-party liability assessments based on deposits into joint bank accounts. Rather than treating all the amounts deposited as transfers of property, the CRA must segregate the amounts that were effectively used for the benefit of the “transferee” joint account-holder.

It remains to be seen if the CRA will change its assessing practice and cease issuing assessments based on the totality of the amounts deposited into spousal joint bank accounts. While taxpayer’s carry the burden to disprove the Minister’s assumptions of fact, the Court’s decision in White v The Queen provides a basis for a third party liability assessment to be vacated based on the Minister’s failure to determine how funds deposited into a joint bank account were ultimately used.

[1] 2020 TCC 22

[2] [1948] Ex. C.R. 580 at 592, [1948] C.T.C. 265

[3] [1995] 1 C.T.C. 2538

[4] 2009 FCA 50