Canada: No Interest On A Section 160 Assessment

First Appeard In Fall 2001 TaxLine:Tax Litigation Briefings.

Section 160 of the Income Tax Act (Canada) (the "Act") provides that where a person has transferred property to a spouse, minor or non-arm’s length person, the transferee will be jointly and severally liable for tax that the transferor was liable to pay at the time of transfer, subject to certain limits. There is no time limit in which the CCRA must assess a taxpayer under section 160 of the Act.

In Algoa Trust v. The Queen,98 D.T.C. 1614, the Tax Court of Canada held that interest could not be charged on an assessment issued under section 160. In Algoa,the corporate taxpayer paid a cash dividend to one shareholder and a stock dividend to the other. At the time the dividends were paid, the company had satisfied all of its tax liabilities. The corporation was subsequently reassessed for additional taxes for the taxation year in which the transfer was made.

The Tax Court held that the payment of dividends was a transfer of property without consideration and that section 160 applied. (However, it is interesting to note that in a recent case, Gestion Yvan Drouin v. The Queen, 2001 DTC 72, the Tax Court of Canada found that the payment of dividends was not a transfer of property without consideration within the meaning of section 160 of the Act.)

Shortly after the decision of the Tax Court in Algoa, the CCRA began collection of the debt owing by the taxpayer. For the period from the date of the section 160 assessment to the date of the Tax Court of Canada’s judgment, interest had been accruing. The taxpayer appealed to the Tax Court of Canada with respect to the accrued interest.

The Tax Court held that section 160 did not create a new tax debt. Accordingly, interest does not accrue on a section 160 assessment, since there is no specific charging provision in the Act providing for interest accruing on a section 160 assessment.

The decision in Algoa was not appealed by the CCRA. However, the CCRA is not accepting that interest is not payable on a section 160 assessment. The CCRA is continuing to assess interest on a section 160 assessment. We have recently had one tax appeal relating to interest assessed under a section 160 assessment allowed based on Algoa.

The case of Ho-A-Shoo v. Attorney General of Canada, 2000 D.T.C. 6293, involves a class action proceeding under the Ontario legislation whereby a representative taxpayer is claiming recovery of interest paid following a successful section 160 assessment on the basis of unjust enrichment. In this case, the taxpayer received gifts from a corporation controlled by her father. The CCRA issued four assessments against the taxpayer under section 160 of the Act. Following a negotiated settlement, the CCRA issued two new reassessments to implement the consent to judgment together with interest.

The payment of unassessed interest accruing after the consent to judgment was also requested. The taxpayer paid all amounts of assessed and unassessed interest as requested. She later instituted a class action proceeding in the Ontario Superior Court of Justice for the recovery of the unassessed interest, alleging that it had been paid under compulsion and by mistake. The CCRA brought a motion seeking to have the taxpayer’s action dismissed, alleging that it was an abuse of process or that the court was without jurisdiction to hear it.

The Ontario Superior Court of Justice denied the minister’s motion to have the action dismissed, finding that it had jurisdiction to hear the issue. The Ontario Superior Court found that there were several procedural advantages to the Ontario Superior Court of Justice retaining jurisdiction in this case, given that it was in the nature of a class proceeding. The CCRA’s motion to dismiss the action was denied. The merits to the class action proceeding in Ho-A-Shoo will be heard by the Ontario Superior Court.

The court’s decision in Algoa is undoubtedly an important one since thousands of taxpayers could be affected. If the taxpayer in Ho-A-Shoo succeeds, taxpayers who have been previously assessed under section 160 and who have paid interest could potentially recover the interest paid: taxpayers who have paid interest on a section 160 assessment should contact their tax advisers