Are you worried about an audit by the Canada Revenue Agency (CRA)? Then avoid what’s called a “red flag.” That’s something the CRA always looks for. For example, suppose you have a little money left in your bank account after paying your taxes. That’s a red flag. Well, according to comedian Jay Leno anyway.
The reality is, paying your own taxes is hard enough. Having to pay someone else’s to boot could leave you shocked and cash-strapped. But it happens often. You see, Section 160 of our tax law could leave you on the hook for someone else’s tax bill. Today, I want to revisit those rules and share two recent stories.
If you receive assets of any value from someone who is related to you, or not dealing with you at arm’s length, you’ve got to think about Section 160. If the transferor happens to owe the CRA money at the time you receive the assets, you could be on the hook for an amount up to the value of the asset you’ve received. That’s right, the taxman could assess you to help satisfy the tax debt of the transferor.
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Now, you’ll be safe from the taxman to the extent you actually pay fair market value for the assets you receive. If, for example, your uncle owes $100,000 to the CRA and then gives you his stamp collection worth, say, $50,000, you could be jointly and severally liable for $50,000 of his tax bill. But if you pay your uncle, say $40,000, for his stamp collection, the CRA can come after you for the $10,000 difference because that represents the “gift” he made to you at a time when he owed taxes. Follow me?
Story: A lawyer's debt
A decision in the case of Aitchison Professional Corp. (APC) vs. The Queen (2018 TCC 131) was handed down by the Tax Court of Canada on July 6. This is the story of a lawyer (Mr. A), his two daughters who are also lawyers, and the professional corporation (APC) the three own.
Mr. A owed the taxman almost $2.1-million and then allegedly transferred an asset worth more than $3-million (referred to as “property”) to APC, for little or no consideration. So, the taxman wanted to apply Section 160 of our tax law to obligate APC to pay Mr. A’s taxes.
What property did Mr. A transfer to APC? Well, he had been providing legal services to clients of APC without taking any payment from APC for himself. So, CRA argued that Mr. A had transferred to APC a “right to invoice for legal services.”
In the end, the court sided with the taxpayer, finding that Mr. A was either employed by APC for no salary or worked as a volunteer. Nothing that Mr. A provided to APC could be described as “property.” That is, “services” are not considered to be property. It might have been a different outcome had Mr. A agreed to be paid and later waived that right (that right could be “property”). As it stands, the taxman can’t assess APC for the taxes owing.
Story: Mother and son
On July 30, the Tax Court of Canada rendered a decision in the case of Shieh vs. The Queen (2018 TCC 154). In this story, Mrs. S was reassessed for taxes owing by her son, M. The fact is, M had transferred to his mother a home that he owned, at a time when he owed taxes. The home was worth $302,000 at the time of the transfer.
In return, Mrs. S assumed a mortgage of $132,000 on the property. So, one would expect that the taxman would assess Mrs. S for an amount up to $170,000 (the home value of $302,000 less the mortgage assumed of $132,000).
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But M had shared with the court that transferring the property to his mother was also to pay her back for almost $200,000 that he owed her (for education, car, business, legal and other personal costs). If this were true, it could reduce the amount owing by Mrs. S. The problem? M was unable to provide any supporting documentation for these loans.
It’s not clear exactly how much is owing to the CRA by M, and the court simply said that it’s between the CRA and M to figure that out (the facts get confusing), but it did rule that Mrs. S can be held liable for her son’s taxes.
The moral of these stories? Beware of the taxman if you’re acquiring assets from someone close to you. And if you’re giving something back in return, make sure you’ve got documentation to support the value of that consideration.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.