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Section 160: Unexpected Consequences

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Gail Baker v The Queen (2016 TCC 120), illustrates the extent to which s. 160 of the Income Tax Act can apply. The decision shows that a taxpayer’s debts may be imposed on his or her inheritors to the extent of any unpaid tax debts at the time of the transferor’s death, even though tax avoidance was not a motivating factor for a transfer of property and the inheritors were unaware of the potential tax liability involved.


On February 16, 2008 Gail Baker’s mother died, leaving her four children –Robert, Terry, Larry and Gail– an undivided share in her residence in Bois-Franc, Québec. Robert Baker died in 2011. 


The transfer of the mother’s estate was formally settled through two documents executed on January 16, 2012, a Declaration of Transmission and a notarial act of assignment. Both documents were dated after Robert’s death.


The Minister of National Revenue subsequently assessed Gail on the basis that the she had acquired an interest in the mother’s residence from Robert at a time when he owed back taxes. At the time of assessment in January 2014, Robert owed a tax debt for the 2004-2007 taxation years totalling $28,938.46.  The minister determined that Gail had received her interest in the property for a consideration that was $4,433 less than the value she had received ($32,500).


Gail appealed the assessment, arguing that the home was never transferred from her mother to Robert, because Robert died before the transfer was formally carried out.


Under section 160, a transfer of property may expose the transferee of the property to any unpaid tax debts of the transferor. In Canada v Livingston (2008 FCA 89, para 17-19), the Federal Court of Appeal established four criteria for the application of the section 160: (i) the transferor must be liable to pay tax under the ITA at the time of the transfer; (ii) there must be a transfer of property, either directly or indirectly; (iii) the transferee must be either the transferor’s spouse or common-law partner, under 18 at the time of the transfer, or a person with whom the transferor is not dealing at arm’s length; and (iv) the fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee.


The Tax Court applied the Livingston criteria to the facts of the property transfers among the members of the Baker family.  The Tax Court found that Gail did not succeed in reversing the minister’s assumptions, and that she had received property following a transfer of the residence without consideration from her brother, such that the Livingstone criteria were met.


This case demonstrates that a taxpayer’s tax liabilities follow him or her, past his or her death, and may be imposed on their inheritors via section 160 of the Act.  In so doing, this case affirms the court’s previously stated view that section 160 is “a draconian provision” (Wannan v Canada, 2003 FCA 423, para 3) and serves as a reminder that there is “no due diligence defence” for tax liabilities incurred through related party transfers.


Perhaps the overall lesson from this case is that taxpayers need to fully deal with their tax obligations during their lifetimes, or risk after-the-fact assessments of their loved ones, who may find that they have inherited much less than originally anticipated.  It is generally true that there is no substitution for good tax advice at the time transactions giving rise to possible tax obligations are under consideration. This is particularly so when the transactions involve transfers of property among family matters. In such a case, family considerations usually dominate the decision making and taxes are often not front of mind. But as this case illustrates, ignorance of the provisions of the Act will be no answer to an assessment if the conditions for the application of section 160 are present.


Robert Krekelwetz and Kathryn Walker,

Millar Krekelwetz LLP, Toronto


A version of this article appeared in the October 2016 issue of Tax for the Owner-Manager.


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