How CRA’s Expanded Section 160 And Budget 2025 Supplementary Rule Closes Asset Transfer Loopholes

Section 160 of the Income Tax Act is one of the Canada Revenue Agency’s most powerful collection tools. It can make the recipient of a property transfer jointly and severally liable for the transferor’s unpaid tax debt where the property moved for less than fair market value to a non-arm’s-length person. The rule is deliberately broad and has never required fraudulent intent. The Federal Court of Appeal has called it a “draconian provision”: Wannan v. Canada, 2003 FCA 423, at para. 3.

For years, sophisticated taxpayers used intermediary structures — planners, holding companies, and multi-step transaction chains — to break the apparent connection between the tax debtor and the ultimate recipient, arguing that no single step constituted a “transfer” caught by section 160. Budget 2025, implemented through Bill C-31 (Budget 2025 Implementation Act, No. 2, S.C. 2026, c. 3), enacted a new supplementary deemed-transfer rule that closes this gap. The rule applies to transactions occurring on or after 16 April 2024.

This article explains section 160’s basic framework, the mechanics of the new supplementary rule, the related penalty extension under subsection 160.01(2), the key case law — including the Federal Court of Appeal’s decision in Canada v. Microbjo Properties Inc., 2023 FCA 157 — and how taxpayers can protect themselves.

Section 160: The Basic Framework

Section 160 imposes derivative tax liability on the recipient of a property transfer. Four conditions must all be met:

• The transferor must owe tax at the time of transfer or at the time of the CRA’s assessment.
• There must be a transfer of property, directly or indirectly, to a non-arm’s-length person or the transferor’s spouse, common-law partner, or a minor.
• The transfer must have been made for consideration less than the property’s fair market value.
• The transferee’s liability is capped at the lesser of the transferor’s tax debt and the excess of the fair market value of the transferred property over the consideration given.

The Supreme Court of Canada in Medland v. Canada, [1998] 4 CTC 293, confirmed that section 160 is a collection provision, not a penalty. There is no good-faith exception: liability attaches to the transaction on its terms, not to the transferee’s state of mind. The Federal Court of Appeal in Wannan v. Canada, 2003 FCA 423, confirmed the rule operates as strict liability once the four conditions are met.

Subsection 160(0.1) clarifies that for these purposes, a transaction includes an arrangement or event. This is relevant to the new supplementary rule discussed below.

The Pre-2024 Structuring Problem: Intermediaries and Planners

Two Federal Court of Appeal decisions illustrated the limits of the original section 160 rule and directly prompted the Budget 2024/2025 legislative response.

In Eyeball Networks Inc. v. Canada, 2021 FCA 17, the Court considered a butterfly reorganization in which a sole shareholder exchanged shares worth approximately $30 million for redeemable shares, transferred those shares to a new holding company, and the original corporation transferred its assets to the holding company.

The notes generated by the redemptions were then set off against each other. The Tax Court had found that the set-off constituted a transfer for nil consideration, but the Federal Court of Appeal reversed, holding that the mutual set-off was equivalent to cross-payments of bona fide debts and therefore could not trigger section 160.

The Tax Court’s decision in Damis Properties Inc. v. The Queen, 2021 TCC 24, similarly found that a multi-step transaction involving the transfer of partnership interests to subsidiaries, a farmland sale, and the routing of proceeds through an arm’s-length third party (WTC) did not trigger section 160 because the taxpayers and their subsidiaries were dealing at arm’s length at the time of the relevant step.

However, the Federal Court of Appeal reversed in Canada v. Microbjo Properties Inc., 2023 FCA 157, finding the vendors liable under section 160. The FCA held that all facts bearing on the section 160 analysis must be considered, and that success was divided: the Crown prevailed on section 160, though not on all issues. See the firm’s analysis at Aggressive Tax Planning Schemes Will Annoy CRA – Microbjo Properties.

Both decisions, and especially Eyeball Networks, which was not appealed, showed that careful structuring could still defeat section 160 in certain circumstances. Budget 2024 announced that this gap would be closed, and Budget 2025 confirmed and implemented that commitment through Bill C-31.

The Budget 2025 Supplementary Rule: How It Works

The supplementary rule, enacted in Bill C-31 and applicable to transactions on or after 16 April 2024, creates a deemed transfer of property for section 160 purposes where a planner intermediary is used to route value away from the tax debtor’s non-arm’s-length recipient.

The rule applies when three conditions are all met:

• There has been a transfer of property by a person (the planner) to a person (the transferee).
• As part of the same transaction or series of transactions, there has been a separate transfer of property from another person (the transferor, i.e., the tax debtor) to the planner, or to any other person.
• One of the purposes of the transaction or series of transactions is to avoid the joint and several, or solidary, liability that would otherwise arise between the transferee and the transferor under section 160.

Where these three conditions are met, the property transferred by the transferor is deemed to have been transferred directly to the transferee for section 160 purposes. The planner is treated as transparent: the CRA can look through the intermediary and assess the transferee as if the transfer had gone directly from debtor to recipient.

The rule applies to the full series of transactions as a whole. The CRA does not need to identify a single step that constitutes a transfer in isolation. It only needs to show that the three conditions were satisfied across the series.

The Section 160.01(2) Penalty Extension

Bill C-31 also extends the penalty in subsection 160.01(2) of the Income Tax Act to apply to tax debt avoidance planning of the type targeted by the supplementary rule. Taxpayers who participate in tax debt avoidance planning covered by the new rule are jointly and severally, or solidarily, liable for the full amount of the avoided tax debt — including any portion that has been effectively retained by a planner.

This extension is significant because it imposes liability on participants in the planning, not just on the ultimate recipient of the transferred property. A taxpayer who engages a planner to structure an intermediary arrangement may face personal liability under subsection 160.01(2) even if they did not directly receive the property that left the debtor’s hands.

Practical Implications by Transaction Type

The new supplementary rule has direct consequences across a range of common planning scenarios:

Family transfers and estate planning

Transfers to spouses, children, or parents for nominal consideration while the transferor carries a CRA liability remain classic section 160 territory. The new rule adds exposure where an intermediary — for example, a family trust or a holding company controlled by a related person — is interposed to break the direct connection between debtor and recipient. Where the intermediary arrangement was structured with the purpose of avoiding section 160, the deemed-transfer rule applies.

Shareholder and corporate distributions

Dividends and other distributions from a corporation with unpaid tax expose the recipient shareholder directly under section 160, as confirmed in Valovic v. The Queen, 2020 TCC 101. The new supplementary rule extends exposure to cases where value is extracted through a chain of steps — such as a dividend to a holding company followed by a loan or distribution to a related individual — where avoiding section 160 is one of the purposes.

Trust and family wealth planning

Trust distributions to beneficiaries can trigger section 160 where the trust owes tax. The Tax Court’s decision in Goldman v. The Queen, 2021 TCC 13, confirmed that a trustee holding bare legal title is not personally exposed under section 160, but where a trust is used as an intermediary to route value from a tax debtor to a beneficiary with an avoidance purpose, the new supplementary rule can apply to deem a direct transfer.

Butterfly reorganizations and corporate restructurings

The Eyeball Networks decision showed that butterfly transactions could escape section 160 through careful note and consideration structuring. The new supplementary rule is targeted at exactly this type of multi-step reorganization. Where a butterfly or divisive reorganization is structured with the purpose of defeating the CRA’s ability to pursue a recipient under section 160, the deemed-transfer rule applies to the series as a whole. Microbjo demonstrates that the FCA was already willing to look through multi-step structures to find section 160 liability even before the supplementary rule.

Key Case Law: Wannan, Muir, Valovic, Goldman, Eyeball Networks, Damis, and Microbjo

The section 160 case law is extensive and fact-specific. The following decisions are the most relevant to understanding how the supplementary rule will operate in practice.

Wannan v. Canada, 2003 FCA 423

The Federal Court of Appeal in Wannan described section 160 as a “draconian provision” that applies strictly once its four conditions are met, regardless of the transferee’s knowledge or intent. Wannan remains the foundational authority for the proposition that section 160 operates as a strict liability rule with no good-faith exception.

Muir v. The Queen, 2020 TCC 8

In Muir, a dentist who was the sole shareholder of a professional corporation received sale proceeds from the corporation subject to an enforceable obligation to use them to repay the corporation’s creditors. The Tax Court found that section 160 did not apply because the settlement of the creditors’ claims represented consideration given by the shareholder in exchange for the funds. The Court also observed that it was not Parliament’s intention to have section 160 apply where the CRA was not and could never have been placed in a worse position by the transfer. Muir illustrates that where the recipient is legally required to use transferred funds for a specific purpose and does so, the consideration analysis may defeat the assessment.

Valovic v. The Queen, 2020 TCC 101

In Valovic, the Tax Court confirmed that when a corporation pays dividends to a shareholder, this constitutes a transfer of property for no consideration. Employment income from the same corporation does not constitute consideration for the dividends. A husband and wife who were equal shareholders and employees of the same corporation were therefore liable under section 160 for the dividends they received while the corporation had unpaid tax.

Goldman v. The Queen, 2021 TCC 13

In Goldman, the Tax Court found that a daughter who received RRSP proceeds as designated beneficiary of her mother’s RRSP, subject to an enforceable obligation to distribute the funds among siblings and pay estate expenses, was merely a bare trustee. The trust itself, not the trustee personally, was the transferee for section 160 purposes, and the value received by the trustee in her personal capacity was nil. Goldman sets a limit on section 160’s reach where the recipient holds property in trust with no beneficial interest.

Eyeball Networks Inc. v. Canada, 2021 FCA 17

In Eyeball Networks, the Federal Court of Appeal reversed the Tax Court and held that a mutual set-off of promissory notes in a butterfly reorganization was equivalent to cross-payments of bona fide debts and therefore could not constitute a transfer for less than fair market value. Eyeball Networks was one of the decisions that directly prompted the Budget 2024 anti-avoidance announcement and the supplementary rule ultimately enacted in Bill C-31.

Damis Properties Inc. v. The Queen, 2021 TCC 24; rev’d in part Canada v. Microbjo Properties Inc., 2023 FCA 157

At the Tax Court level, Damis found that a multi-step farmland sale transaction involving an arm’s-length third party did not attract section 160 because the taxpayers and their subsidiaries were dealing at arm’s length at the time of the relevant step. The Federal Court of Appeal reversed in Microbjo, holding that all facts bearing on the section 160 analysis must be considered across the series and finding the vendors liable under section 160. Microbjo is significant because it shows the FCA was willing to apply section 160 across multi-step transactions even before the supplementary rule was enacted. See the firm’s detailed analysis: Aggressive Tax Planning Schemes Will Annoy CRA – Microbjo Properties.

Defences Against a Section 160 or Supplementary Rule Assessment

Taxpayers who receive a section 160 assessment, whether under the main rule or the new supplementary rule, have several potential defences:

• Fair market value consideration: demonstrating that the recipient paid full fair market value at the time of the transfer defeats the assessment entirely.
• No avoidance purpose: under the supplementary rule, the CRA must show that one of the purposes of the transaction or series was to avoid section 160 joint and several liability. A transaction structured for legitimate commercial reasons, without that purpose, is not caught.
• No tax debt at the time of the transfer: if the transferor did not owe tax at the relevant time, section 160 cannot apply.
• Arm’s length: if the ultimate transfer was between parties who were genuinely at arm’s length, and the supplementary rule’s purpose condition is not met, the assessment may fail.
• Bare trust or trustee: following Goldman, a recipient who holds transferred property as bare trustee with no beneficial interest may not be personally liable.
• Legal obligation over the funds: following Muir, where the recipient received the transferred property subject to an enforceable obligation to apply it for a specific purpose, that obligation may constitute consideration sufficient to defeat the assessment.
• The value cap: the recipient’s liability cannot exceed the shortfall between the fair market value of the property and the consideration paid. Partial consideration reduces exposure proportionately.
• Objection and appeal: a section 160 assessment is subject to the same objection and Tax Court appeal process as any other CRA assessment.

Related Provisions and CRA Enforcement Context

The supplementary rule and section 160.01(2) penalty extension sit within a broader legislative framework targeting tax debt avoidance. Other provisions that interact with section 160 in practice include:

• Section 160.01: imposes penalties on participants in tax debt avoidance transactions and, as amended by Bill C-31, now extends to the supplementary deemed-transfer arrangements.
• Section 160.1: extends similar derivative liability to recipients of excess tax refunds paid to a non-arm’s-length person.
• Section 160.2: applies to RRSP and RRIF transfers in certain situations.
• Section 160.4: extends the rule to transfers by a taxpayer subject to departure tax under subsection 128.1(4).
• General anti-avoidance rule (section 245): may apply independently to a series of transactions structured to abuse the object and spirit of section 160, as the CRA argued (unsuccessfully at the TCC level) in Damis, and as reinforced by the FCA in Microbjo.

The CRA also has broad collection powers under sections 222 to 229, including registering a certificate in Federal Court and executing against the taxpayer’s property. Section 160 and the supplementary rule complement those powers by enabling the CRA to pursue the person who received the transferred value rather than only the original debtor.

Frequently Asked Questions

What is section 160 of the Income Tax Act?

Section 160 makes the recipient of a property transfer jointly and severally liable for the transferor’s unpaid tax where the transfer was made to a non-arm’s-length person for less than fair market value while a tax debt was outstanding. The recipient’s liability is capped at the excess of the fair market value of the property over the consideration paid.

What is the Budget 2025 supplementary rule and how does it differ from the main section 160 rule?

The main section 160 rule applies where a tax debtor transfers property directly to a non-arm’s-length person for less than fair market value. The supplementary rule, enacted in Bill C-31 and applicable to transactions on or after 16 April 2024, extends this to indirect transfers through an intermediary (planner) where one of the purposes of the arrangement is to avoid section 160 joint and several liability. Where the three conditions of the supplementary rule are met, the property is deemed to have been transferred directly from the debtor to the recipient for section 160 purposes.

What are the three conditions for the supplementary rule to apply?

The supplementary rule applies when: (1) a planner transfers property to a transferee; (2) as part of the same transaction or series, the transferor (tax debtor) transferred property to the planner or to any other person; and (3) one of the purposes of the transaction or series was to avoid joint and several, or solidary, liability between the transferee and the transferor under section 160.

When did the supplementary rule come into effect?

The supplementary rule applies to transactions occurring on or after 16 April 2024. It was first announced in Budget 2024, confirmed in Budget 2025, and enacted through Bill C-31 (Budget 2025 Implementation Act, No. 2, S.C. 2026, c. 3).

What is the section 160.01(2) penalty extension?

Bill C-31 extended the penalty in subsection 160.01(2) to apply to participants in tax debt avoidance planning covered by the new supplementary rule. Taxpayers who participate in such planning are jointly and severally liable for the full amount of the avoided tax debt, including any portion retained by a planner. Both the ultimate recipient and the person who organized the structure can face personal liability.

What did the Federal Court of Appeal decide in Microbjo Properties?

In Canada v. Microbjo Properties Inc., 2023 FCA 157, the Federal Court of Appeal reversed the Tax Court’s decision in Damis Properties and found the vendors liable under section 160 for taxes owed by an unrelated purchaser. The FCA held that all facts bearing on the section 160 analysis must be considered across the entire series of transactions. Microbjo demonstrates that the FCA was already willing to apply section 160 across multi-step structures before the Budget 2025 supplementary rule was enacted.

Does the supplementary rule apply to all multi-step transactions involving related parties?

No. The supplementary rule requires that one of the purposes of the transaction or series was to avoid joint and several liability under section 160. Multi-step transactions structured for genuine commercial reasons, without an avoidance purpose, are not caught. Documenting the commercial rationale for any complex related-party transaction is therefore important.

Can a section 160 assessment be challenged?

Yes. A section 160 assessment — including one based on the supplementary rule — can be objected to through the CRA’s objection process and appealed to the Tax Court of Canada. Common defences include demonstrating that consideration was at fair market value, that the avoidance purpose condition is not met, that the transferor had no tax debt at the relevant time, or that the recipient held the property as a bare trustee with no beneficial interest.

Does section 160 apply to transfers between spouses?

Yes. Spouses are not at arm’s length, so a transfer of property between spouses for less than fair market value while one spouse owes tax exposes the recipient spouse to section 160 liability. The spousal rollover rules under section 73 do not prevent a section 160 assessment. The new supplementary rule also applies if the transfer is routed through an intermediary with the purpose of avoiding that liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.