18 September 2018

Do Transfers To Agents Invoke Vicarious Tax Liability Under Section 160? A Canadian Tax Lawyer's Analysis

Rotfleisch & Samulovitch P.C.


Rotfleisch Samulovitch PC is one of Canada's premier boutique tax law firms. Its website,, has a large database of original Canadian tax articles. Founding tax lawyer David J Rotfleisch, JD, CA, CPA, frequently appears in print, radio and television. Their tax lawyers deal with CRA auditors and collectors on a daily basis and carry out tax planning as well.
Section 160 of the Income Tax Act is a tax collection tool. It thwarts a taxpayer's attempts at moving money beyond the tax collector's reach by placing it in presumably friendly hands.
Canada Tax
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Introduction – Subsection 160(1) of the Income Tax Act

Section 160 of the Income Tax Act is a tax collection tool. It thwarts a taxpayer's attempts at moving money beyond the tax collector's reach by placing it in presumably friendly hands.

Subsection 160(1) of the Income Tax Act applies if four conditions are met:

  • There was a transfer of property;
  • The transferor was, at the time of the transfer, liable to pay an amount under the Income Tax Act;
  • The transferee was, at the time of the transfer, either (i) the transferor's spouse or common-law partner or a person who has since become the transferor's spouse or common-law partner, (ii) a person who was under 18 years of age, or (iii) a person with whom the transferor was not dealing at arm's length; and
  • The fair market value of the property transferred exceeded the fair market value of the consideration given by the transferee.

When subsection 160(1) applies, the transferor and the transferee both become "jointly and severally" liable for the transferor's tax debt. Specifically, the transferee becomes independently liable for the transferor's tax debt, but the transferee's liability is capped at the fair market value of the transferred property.

The Canada Revenue Agency (CRA) can therefore commence collections action on both the original tax debtor and the transferee. In fact, the transferee remains liable to the CRA even if the original tax debtor is later released from the underlying tax debt under a bankruptcy discharge (e.g.: Canada v Heavyside, 1996 CanLII 3932 (FCA)).

The Judicial Dilemma: Constricting Section 160 in Unfair Cases

Courts admit that section 160 may lead to a patently unjust result:

While not every use of section 160 is unwarranted or unfair, there is always some potential for an unjust result. There is no due diligence defence to the application of section 160. It may apply to a transferee of property who has no intention to assist the primary tax debtor to avoid the payment of tax. Indeed, it may apply to a transferee who has no knowledge of the tax affairs of the primary tax debtor [Canada v Heavyside, ibid, at para 3].

So, it's unsurprising a court may seek to oust the provision when faced with a very sympathetic case. For instance, in LeBlanc v The Queen (99 DTC 410 (TCC)), a taxpayer's wife took over his financial affairs when he became very ill. The wife deposited the taxpayer's RRSP into their joint bank account and used the funds solely for her husband's finances. The taxpayer owed money to the CRA when his wife transferred his RRSP into their joint account. So, the CRA assessed the wife under subsection 160(1).

The language of subsection 160(1) would suggest that the wife was caught by the rule. The provision covers situations where a taxpayer "transferred property, either directly or indirectly, by means of a trust or by any other means whatever." In other words, a broad range of transactions could constitute a "transfer" for the purpose of subsection 160(1).

Yet the Tax Court of Canada held that no transfer took place. In particular, the court decided that the funds did not vest in the wife because she only dealt with the funds as her husband's agent. Subsection 160(1) therefore did not apply.

Does a Transfer to an Agent Trigger Section 160? Unsettled Jurisprudence

The Federal Court of Appeal later questioned the LeBlanc decision in The Queen v Livingston (2008 FCA 89):

The respondent cites the Tax Court of Canada's decision in Leblanc v. The Queen... . In that case, Tax Court Justice Hamlyn found that following a deposit into a jointly held bank account the property did not vest in or pass to the wife as the wife was acting as agent for her ill husband. That finding in and of itself is suspect: there was certainly a transfer of property [Livingston, ibid, at para 23].

In Livingston, the tax debtor deposited funds into a friend's bank account. The Federal Court of Appeal held that the deposit constituted a transfer to the friend because the bank account was solely under the friend's name and thus "permitted [the friend] to withdraw those funds herself anytime." Indeed, this reasoning should extend to cases involving deposits into joint accounts—such as LeBlanc. After all, a joint bank account permits either of the joint holders to withdraw all funds at anytime.

The Livingston decision would seemingly suggest that acquiring property solely as an agent doesn't thereby render one immune from section 160.

Later jurisprudence, however, indicates that this may not be the case. For example, despite its comments in Livingston, the Federal Court of Appeal later affirmed the Tax Court's decision in Lemire v The Queen (2012 TCC 367; aff'd. 2013 FCA 242). Notably, in Lamire, the Tax Court ousted section 160 for essentially the same reasons that the Tax Court offered in LeBlanc—and the Federal Court of Appeal lambasted in Livingston.

In Lemire, a tax debtor and his friend made an oral agreement: the tax debtor would write cheques to his friend, who would then deposit the cheques into her personal bank account, withdraw the equivalent in cash, and promptly pay that cash back to the tax debtor. The CRA assessed the friend under section 160 for the amounts she deposited into her personal bank account.

The Tax Court of Canada held that section 160 didn't apply because no transfer took place. The agreement between the debtor and his friend meant that "[a]t no time did the [friend] have the right to use, enjoy or dispose of the proceeds of the deposited cheques as she saw fit." Moreover, the friend "never believed that the deposits would profit her, or even that she could appropriate them, in whole or in part."

The Tax Court also addressed the Federal Court of Appeal's comments in Livingston. The Tax Court noted that, despite Livingston, the notion of agency still proved relevant in determining whether a transfer indeed took place:

Although Livingston is of precedential value, several cases of the Tax Court of Canada stand for the proposition that amounts paid to a mandatary for the sole benefit of the mandator, or according to the mandator's specific instructions, do not constitute a transfer within the meaning of subsection 160(1). ... [S]ince Livingston, some cases of the Tax Court of Canada have continued to take the concept of mandate or agency into account in determining whether there has been a transfer under section 160 [Lemire, TCC, at paras 41 and 45].

The Crown appealed.

But the Federal Court of Appeal upheld the Tax Court's decision. Addressing the Tax Court's treatment of Livingston, the Federal Court of Appeal condoned the lower court's reasoning because Livingston unfolded in a common-law jurisdiction while this case occurred in a civil-law jurisdiction:

The TCC judge correctly analyzed the relationship between the parties in accordance with civil law and did not err in refusing to apply this Court's decision in Livingston. The rule set out in Livingston is based on the common law, and the TCC judge was bound to apply the civil law. From a civil law perspective, the sums deposited in the respondent's account remained the property of Mr. Dupuis. It is also clear that the right to withdraw that money was of no value to the respondent given her obligation to remit the sums to Mr. Dupuis. It follows that no property was transferred for the purposes of subsection 160(1) [Lemire, FCA, at para 30].

But this explanation suggests that the appellate court's comments in Livingston should bear little weight on future decisions. A civil-law mandatary is in basically the same position as a common-law agent. In particular, neither has a claim to property received as an agent or mandatary; the property remains that of the principal or mandator. Moreover, the appellant court's comments in Livingston weren't anchored on any particular common-law concept; they evaluated the nature of deposits into a joint account—an arrangement that's afforded the same treatment in both legal systems. So, there doesn't seem to be much basis for confining Livingston to common-law cases. The Livingston decision should therefore either apply consistently across both legal systems or apply to neither. The holding in Lemire suggests the latter.

Granted, the Federal Court of Appeal has not yet had an opportunity to clarify this issue.

Tax Tips – Assessments Under Section 160

You expose your friends and relatives to CRA collections if you transfer property to them in an attempt to keep assets away from CRA

If you anticipate a transaction with a non-arm's length party with tax debt, consult one of our expert Canadian tax lawyers for advice on reducing your exposure to an assessment under section 160

If you're assessed under section 160, you may challenge not only the merits of the 160 assessment itself but also the underlying tax debt (even if the original taxpayer never challenged the tax debt or did challenge the tax debt yet failed to lower the amount).

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.

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