Section 160 of the Income Tax Act permits the CRA to assess “at any time” a taxpayer who receives property for inadequate consideration from a non-arm’s length person who, at the time of the transfer, has a liability under that Act. Section 160 gives the CRA very long arms indeed when it is trying to reach into a taxpayer’s pocket, as is shown by Wannan v. The Queen, 2003 FCA 423, 1 C.B.R. (5th) 117, [2004] 1 C.T.C. 326, [2003] D.T.C. 5715.
Dr. Wannan owed amounts to the CRA in respect of his 1988, 1989 and 1995 taxation years. The former amounts were relatively small; the amount for 1995 was quite large. Dr. Wannan, in 1989 through to 1995, made gratuitous contributions to his wife’s RSP. The contribution for 1995 was relatively small. Early in 1996, Dr. Wannan went bankrupt. Some time before February, 1999, the CRA received an interim dividend from Dr. Wannan’s estate. The CRA proceeded to apply the interim dividend to the liability arising in 1995, leaving amounts outstanding for 1988 and 1989.
Not coincidentally, the largest contributions to Ms. Wannan’s RSP occurred before 1995. If the CRA had applied the interim dividend to the oldest debts first, Dr. Wannan would not have been a tax debtor at the time he transferred amounts to his wife’s RSP. The CRA did not apply the interim payments in this manner, however. Instead, it applied the dividends it received to the 1995 liability, which the payment did not eliminate. The CRA then proceeded to assess Ms. Wannan under section 160 in February, 1999. Was the CRA entitled to behave in this manner?
According to the Federal Court of Appeal, it was. The Court confirmed its own decision in Heavyside v. The Queen, 1996 CanLII 3932, 206 N.R. 206, 43 C.B.R. (3d) 128, [1997] 2 C.T.C. 1, 97 D.T.C. 5026, 25 R.F.L. (4th) 334 (F.C.A.). The Court summarized Heavyside as follows:
Heavyside can be taken as authority for at least three propositions. (1) Liability under section 160 of the Income Tax Act arises upon a transfer of property in circumstances that meet the statutory conditions, not on the date on which the liability is assessed. (2) A section 160 liability survives the bankruptcy of the principal tax debtor. (3) A section 160 liability survives the bankruptcy discharge of the principal tax debtor. The statutory basis of the third proposition is that although subsection 178(2) of the Bankruptcy and Insolvency Act provides that a discharge relieves the bankrupt person from liability for a debt proved in the bankruptcy, section 179 of that Act prevents the discharge from giving the same relief to a person who, at the date of the bankruptcy, was jointly liable for the debt.
The bankruptcy of Dr. Wannan, then, did not eliminate the derivative liability of his wife.
What about the manner in which the CRA applied the debt? Court acknowledged that, ordinarily,
the Crown will recognize the right of a taxpayer paying his or her own tax liability to direct how the payment should be applied. It has also been established that if a tax payment has initially been applied in a particular way, the Crown and the taxpayer may agree that it will be applied in a different way: The Queen v. Union Gas (1990), 116 N.R. 220, [1991] 1 C.T.C. 1, 90 D.T.C. 6659 (F.C.A.). However, I am aware of no case in which the Crown was compelled to apply a tax payment to a particular tax debt if the payment is not directed to that debt, and there is no agreement between the payer and the Crown as to how the payment is to be applied.
The Court, therefore, concluded as follows:
[35] The argument for Ms. Wannan is that the Crown should be bound by its normal first in, first out practice. Just as the Court in Clayton’s Case found it unfair to the bank (or its unsecured creditors) for a single depositor to be able to reconstruct the application of payments after the fact, counsel for Ms. Wannan argues that, when the Crown is determining the amount to be assessed against Ms. Wannan under section 160, the Crown should not be able to make unilateral retroactive adjustments to Mr. Wannan’s tax account.
[36] The argument for Ms. Wannan rests on a single fact, which is that the Crown normally maintains a single running account for each tax debtor. Counsel for Ms. Wannan referred to no statutory requirement for such an accounting method. Nor is there any evidence as to why the Crown keeps its accounts as it does; I assume it is a matter of convenience. The practice of the Crown in keeping track of a tax debt as a running account seems to me to be an insubstantial basis for extending the first in, first out rule in Clayton’s Case to all tax debts. For that reason, I am not persuaded that in this case, there is any reason to preclude the Crown from applying the bankruptcy dividend as it did, to the newest of Dr. Wannan’s tax liabilities.
