I’ve written a number of blog posts and articles on the “long arm” of section 160 of the Income Tax Act (Canada), and I’ve mentioned that liability under section 160 does not depend on whether the transferor or transferee know of a liability of the transferor in respect of which the section could apply.
Mr Smith might file his return for year X in year X+1 and be assessed for year X as not owing any tax. Mr Smith might then transfer property to his wife in year X+1. In light of the assessment, both Mr and Ms Smith might believe in good faith that Mr Smith didn’t owe tax at the time of the transfer. Perhaps Mr Smith made the transfer of property for reasons that had nothing to do with his financial circumstances (he’s perfectly solvent at the time of the transfer).
Let’s assume, however, that Mr Smith encounters financial difficulties in X+2 and the CRA reassesses him in that same year for taxes owing in year X because of an innocent error Mr Smith made in filing his return for that year. Let’s say that Mr Smith can’t pay the tax bill for year X. The CRA will likely assess Ms Smith under section 160 in respect of the amount owing, and the assessment will likely be upheld.
Subsection 152(1) of the Act provides that “the Minister [of National Revenue] shall, with all due dispatch, examine a taxpayer’s return of income for a taxation year, [and] assess the tax for the year, the interest and penalties, if any, payable”. Subsection 152(3) of the Act provides that “Liability for the tax under this Part [Part I of the Act] is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made”. Subsection 152(4) of the Act permits the Minister “at any time [to] make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer”. The courts have interpreted these subsections as providing the Minister with the power of preparing a notice that confirms the amount of tax, penalties and interest payable under the Act. The Minister, however, by creating and issuing an assessment or reassessment, does not create the liability. The liability is created by the application of the provisions of the Act to the facts and circumstances of a taxpayer, and the liability accrues in the year, or at the time a transaction is completed, and not when the fact of the liability is recognized by an assessment or reassessment.
In No 605 v MNR, 59 DTC 159 (TAB), a husband transferred shares to his wife in late 1953, at a time when he believed he did not owe any income tax. The Minister later reassessed the husband under the Act for his 1952 taxation year and then assessed his wife under the predecessor to section 160 of the Act (the transferee joint liability provision) in respect of the husband’’s debt. The wife, on appeal, tried to argue that, at the time of the transfer of shares, her husband did not owe any tax because the reassessment for 1952 was not issued until after the transfer of the shares. The Tax Appeal Board rejected this argument:
The general charging section in the present Act is section 2 and it provides, inter alia, that an income tax shall be paid as thereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year. Income tax legislation has now been on the statute books of Canada for over forty years and every businessman knows that if his net income for a particular year is large enough, he may expect to be taxed thereon in due course. It is true that ordinarily he will file a return within the prescribed period and perhaps await an assessment notice, but these steps are not a prerequisite before tax can become payable. Section 42(3) provides that liability for tax under Part I of the Act is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made. Subsection (5) of the same section even provides that the Minister shall not be bound by a return supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return so supplied or if no return has been filed, assess the tax payable under Part I. Hence, it is clear that while a return should be filed, neither the absence thereof nor the omission to assess at all, can affect a taxpayer’s liability to pay whatever tax is, at some time or another, deemed collectible from him.
In Canada v Heavyside, 1996 CanLII 3932, 43 CBR (3d) 128, 25 RFL (4th) 334, 51 DTC 5026, [1997] 2 CTC 1, the Federal Court of Appeal, per Decary, JA, put the matter this way in describing the effect of an assessment under section 160 of the Act:
The moment chosen by the Minister to assess the transferee is of no consequence. It is trite law that liability for tax results from the Act and not from the assessment [The Queen v. Simard-Beaudry Inc., [1971] F.C. 396 at 403 (F.C.T.D.), Noël A.C.J.] and that in the instant case it is the transfer that triggers the liability. The respondent, therefore, was personally liable, in her 1989 taxation year, for income tax in respect of the gains from the disposition of the property transferred and her liability being joint and several with that of her husband, it had a life of its own and survived the eventual extinguishment through bankruptcy, in 1994, of her husband’s own tax liability. The fact that she was assessed only in 1994 and only after her husband’s discharge is irrelevant as far as her own liability is concerned.
To similar effect is Wannan v Canada, 2003 FCA 423, 1 CBR (5th) 117, 57 DTC 5715, [2004] 1 CTC 326.
