There are countless things to keep in mind when you're a small-business owner dealing with the Canada Revenue Agency (CRA). It explains why accountants and tax lawyers are usually so busy advising their clients about the perils of the Income Tax Act and the benefits of remaining on the right side of the CRA.
One of the many perils involves gifts that successful entrepreneurs or other business people might make to family members, say for a first house or a wedding, particularly if – at the time the gift was made – the entrepreneur was offside with the CRA and owed tax.
It is the recipient of the gift who may pay the real price.
Vancouver tax lawyer Jeff Glasner likes to explain the scenario and its ramifications in these terms: Let's say "Mandy" is raised by her mother because her father abandoned them years before. Whether guilt made him do it or not, Mandy's father "gifts" her $100,000 for a dream wedding. The problem is, at the time, her father and his unincorporated business owed the CRA money.
Years later, Mr. Glasner says, the ramifications could play out this way: Mandy is pregnant with baby No. 3, her husband has been laid off, and the small business she owns is struggling. A letter comes in the mail from the CRA saying Mandy is now responsible for $100,000 of her father's tax debts.
Have a nice day.
Why? Her father's small business was on the rocks when he made the gift, and he owed the CRA a lot of money when he paid for the wedding. It doesn't matter that she wasn't aware at the time. It doesn't mater that she was raised by her mother and had little contact with her father.
Regardless of her knowledge, Mandy became jointly and severally responsible for her father's tax liabilities the moment she received his gift. To collect on this liability, the CRA may put a lien against her home, garnish her pay cheques and/or freeze and empty her bank accounts.
Section 160 of the Income Tax Act says that upon receiving a gift, a person becomes liable for the tax debts of the related gift giver to the lesser of the amount of the giver's tax debt and the amount of the gift. Mr. Glasner says there are three primary defences used to argue against an assessment under Section 160. First, Mandy's father didn't actually owe the taxes. Second, he owed Mandy money when he gave her the gift, meaning his "gift" was not a gift at all, but a repayment. And third, the gift was not worth as much as the CRA says it was.
Mr. Glasner says there are many activities that small-business owners can get involved in to trigger potential exposure under Section 160. These include but are in no way limited to situations where:
• The tax-debtor husband takes his name off the title of the house he owns jointly with his wife.
• The tax-debtor wife makes mortgage payments on the family home that is solely in the husband's name.
• The tax-debtor corporation pays a dividend to an individual who on his or her own (or combined with relatives), has a controlling position in the corporation.
Mr. Glasner says these kinds of assessments are very common as the CRA is under increasing pressure to collect unpaid tax debts. As well, there is no time limit to the CRA's ability to instigate a Section 160 assessment, so an individual may never have the comfort of feeling totally in the clear about a transfer from a family member, even if it happened a long time ago.
Mr. Glasner suggests that when the hypothetical Mandy got the letter in the mail from the CRA, she should have sought professional advice as soon as possible. This could have at least bought her some time as the process allows a short period for defences to be presented prior to any formal assessments. Mr. Glasner says it's often during this "pre-assessment" stage that a tax lawyer is in the best position to make the matter go away.
In any event, the possibility of receiving a letter in the mail under Section 160 should be a wake-up call to small business owners who want to give gifts to family members when they have outstanding tax liabilities.
It's also a wake-up call to recipients when a gift might not be a gift at all, but a tax nightmare.
Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.
Tony Wilson