Lessons from Recent Jurisprudence: Helping Clients Avoid or Defend Against a Section 160 Assessment
Dean Blachford, Tax Litigation Lawyer
Isabelle St-Hillaire, Law Student
Clients facing financial difficulties may be tempted to transfer property to a related party in an attempt to shelter their assets from creditors. Professionals working in the field of bankruptcy and insolvency know, however, that in the context of tax debts section 160 of the Income Tax Act  enables the Minister of National Revenue (Minister) to collect the debt from the friend, member, shareholder, or related corporate entity to whom the property was transferred.
Section 160 provides that when a tax debtor transfers property to a non-arm’s length person without receiving adequate consideration, the transferee becomes liable for the tax debt, up to the value of the property minus any consideration they provided. This article will review the legal test used in applying section 160 and will address key points which surfaced in recent jurisprudence from the Tax Court and the Federal Court of Appeal.
OVERVIEW OF THE LEGAL TEST
Four criteria must be met for section 160 to apply: 
- There must be a transfer of property: The transfer of property may be direct or indirect, by means of a trust or by any other means. Depositing funds into someone else’s bank account, for example, is considered a transfer of property.
- The transfer must be to a non-arm’s length party: The transferor must have been a tax debtor at the time of the transfer, while the transferee must have been either the transferor’s spouse or common law partner (or a person who has become so since), a minor, or otherwise a person with whom the transferor was not dealing at arm’s length.
- The transfer must have taken place at a time when the transferor had a tax debt: The burden of proof is on the Minister to establish that the transferor had a tax debt at the time of the transfer. After that, the burden, as with most other tax disputes, is on the taxpayer to refute the CRA’s assessment. 
- There must have been an absence or insufficiency of consideration: The taxpayer must show that the FMV value of the consideration they provided is equal to or greater than the FMV of the property they received. It is difficult for the transferee to argue that they provided consideration for the property by promising to give it back later or by providing food and shelter in exchange. Any consideration relied on by the transferee must be based on a contractual obligation.
When these four criteria are met, subsection 160(2) allows the Minister to assess a taxpayer “at any time,” meaning there is no limitation period. 
SUCCESSFUL APPEALS TO THE TAX COURT
Some recent decisions by the Tax Court have treated taxpayers rather favourably. The Konyi and Connolly decisions provide a reminder that although agreements in writing may be preferable, verbal contracts may also be found to be valid, and credible testimony may suffice to convince the Court that section 160 does not apply.
In Konyi , the Minister assessed Ms. Konyi for her husband’s tax debt after he transferred her his half-interest in a property which they previously owned jointly. The spouses testified that, acting on the advice of Mr. Konyi’s accountant and friend , they entered into a verbal agreement pursuant to which Ms. Konyi would provide consideration reflecting the FMV of the transferred property, and that payments would be completed by the end of the year. The Tax Court Judge found, based on the witnesses’ credible testimony, that at the time of the transfer, an agreement existed which included all the essential terms.
The validity of a verbal agreement was also examined in Connolly . In that case, Ms. Connolly successfully argued that the transfers she received from her common-law partner at a time when he owed tax were actually repayments for funds that she had lent him in the past. Ms. Connolly deposited cheques obtained from her partner’s businesses into her account and also received payments from him. As Ms. Connolly was a very credible witness, she succeeded in convincing the Court that her partner had not transferred her funds absent consideration; rather, he had paid back a debt.
THE FEDERAL COURT OF APPEAL WEIGHS IN
Two recent decisions from the Federal Court of Appeal were not as favourable to the taxpayers and highlight important nuances of section 160 assessments.
Brassard  provides a reminder that a transferee remains liable even after transferring the property back to the transferor. Mr. Brassard paid his brother, who was a tax debtor at the time, $50,000 for property that was worth $120,000. When Mr. Brassard’s brother was discharged from bankruptcy, Mr. Brassard transferred the property back to him for $50,000. The FCA confirmed that Mr. Brassard was liable for the debt even though his brother had been absolved of the debt through bankruptcy and Mr. Brassard had returned the property.
In Klundert , the FCA confirmed Ms. Klundert’s liability for the tax debt accumulated by her husband, an optometrist convicted of tax evasion. He had directed OHIP to deposit the payments for his services into Ms. Klundert’s bank account. The FCA confirmed that the deposits constituted transfers of property as she became the legal and beneficial owner of the funds once they were deposited into her account.
AVOIDING TROUBLE – AND OVERCOMING IT
Simple precautions may help clients avoid being caught by section 160. These include setting down any agreement in writing and in detail, keeping meticulous and contemporaneous records of payments made by the transferee and of the value of any improvements added to a property by the transferee before it is transferred back to the transferor, annotating cheques or online transfers in a clear manner, and using individual bank accounts rather than joint accounts when making or receiving payments by spouses. Even when such precautions have been omitted it may be possible to demonstrate that a transferee provided sufficient consideration, or that another condition of the four-part test is unmet. As recent jurisprudence illustrates, section 160 cases are heavily fact-based, thus leaving room for effective advocacy.
HOW WE CAN HELP
At HazloLaw – Business Lawyers we have extensive experience successfully representing individuals and corporations in tax disputes with the CRA and at the Tax Court of Canada. We look forward to partnering with you to help your clients resolve any tax disputes they may have or to avoid them before they arise.
 Income Tax Act, RSC 1985, c 1, s 160(1) [ITA].
 See for example Canada v Livingston, 2008 FCA 89 at 17 [Livingston].
 Gestion Yvan Drouin Inc v The Queen,  2 CTC 2315 at 114.
 ITA, supra note 1, s 160(2).
 Konyi v The Queen, 2017 TCC 175 [Konyi].
 Ibid at 7. The transaction was admittedly an operation aimed at protecting the property from Mr. Konyi’s creditors. The accountant had explained that the transfer had to be made in exchange for FMV consideration for this to work.
 Connolly v The Queen, 2016 TCC 139 at 34 [Connolly].
 Brassard v Canada, 2017 FCA 205 [Brassard].
 Klundert v Canada, 2017 FCA 134 [Klundert].
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, [email protected]