It is a plot device in many Hollywood films. Amanda Johnson is raised by her mother, grows into a beautiful young woman and finds Mr. Right. In the first scene of the film, Mr. Right takes her on a walk in the park, gets on one knee and proposes to her. The next scene takes place at brunch where Amanda and her mother are finishing off the champagne. A conversation ensues about Amanda wanting to find her father so that she can understand the reasons he left the two of them. Mother Johnson reveals that she does have some previously unshared information on where Amanda’s father is now living. In the next scene, Amanda and her best friend/maid of honour pack into her Volkswagen Beetle for the road trip. Skip through the second act of the movie where the father is found and we get to the point where Dad, feeling guilty for missing Amanda’s life, surprises her with a $100,000 dream wedding. The movie ends with the wedding scene, a throw of a bouquet, Dad telling Mother Johnson how good she did raising their daughter and final credits.
Any tax lawyer would know that there is a sequel to this movie, based on section 160 of the Income Tax Act. In the sequel, set eight years down the road, Amanda is pregnant with child number three. Mr. Right has just recently been let go by his advertising firm and the couple is struggling to pay the bills. Suddenly a letter comes through the mail slot from the Canada Revenue Agency saying that Amanda is now on the hook for $100,000 of her absentee father’s tax debts.
You see, because Amanda’s dad owed the Canada Revenue Agency money at the time he paid for her wedding, regardless of whether Amanda knew of his debt or not, she became jointly responsible for his tax liabilities when she received his gift. The next few scenes in the sequel include a lien against Amanda’s house, garnishment of her paycheques and freezing and emptying of her bank accounts. Thanks Dad.
Section 160 of the Income Tax Act says that upon receiving a gift, a person will become liable for the tax debts of the related gift giver to the lesser of the amount of the gift giver’s tax debt and the amount of the gift.
There are three basic defences that are argued against these assessments:
- Dad did not actually owe the taxes;
- Dad owed Amanda money when he gave her the gift, making it not a gift at all; and
- The gift was not worth as much as the Canada Revenue Agency assumed it was worth.
The fact that Amanda was not aware of her father’s tax debt is not a defence to the assessment against her.
Other Factual Scenarios
There are many activities that may trigger potential Section 160 exposure. These include but are in no way limited to situations where:
- tax debtor husband takes his name off title of the house he owns jointly with his wife;
- tax debtor brother endorses cheques over to his sister so that he can avoid depositing them in his own bank account; or
- tax debtor corporation pays a dividend to an individual who themselves or combined with their relatives, have a controlling position in that corporation.
These sorts of assessments are very common as the Canada Revenue Agency is under increased pressure to collect unpaid tax debts. Moreover, as there is no time limit to their ability to initiate these assessments, an individual may never have the comfort of feeling “in the clear” over a past transfer from a family member to them.
When Amanda got that letter in the mail, her best course of action would have been to immediately contact a tax lawyer. The process allows a short period of time for defences to be presented prior to assessments being issued. It is often at this pre-assessment stage that we are able to resolve these matters in our clients’ favour. Even if Amanda had waited until a formal assessment was received, there is still a formal objection process during which we have had great success reducing or completely eliminating these types of assessments. Amanda, give me a call.
Tags: Article; Individual Tax Planning; Jeff S. Glasner; Tax Disputes