Canadian Tax Trap: Dividends From A Corporation With Tax Debts Leads To Derivative Tax Liability: Kufsky V The Queen, 2019 TCC 254 ' Canadian Tax Guidance From A Canadian Tax Lawyer

• Published date: 09 May 2022
• Subject Matter: Finance and Banking, Tax, Financial Services, Income Tax, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction - Derivative Tax Liability under Section 160 of Canada's Income Tax Act & Dividends from Tax-Debtor Corporations

Section 160 of Canada's Income Tax Act is a tax collection tool. It thwarts taxpayers who try to hide assets from the Canada Revenue Agency's tax collector by transferring those assets to friends, relatives, related corporations, or shareholders.

Section 160 captures a broad range of transactions, including dividend payments. The Tax Court's decision in Kufsky v The Queen, 2019 TCC 254, illustrates that, if you receive a dividend from a corporation that has outstanding income-tax debts, section 160 allows the CRA's tax collectors to chase you for that corporation's income-tax debt. If the amount of the dividend is less than the corporation's income-tax debt, your derivative tax liability is capped at the amount of the dividend. You can also reduce the derivative tax liability by showing that you provided consideration for the asset that you received from the tax debtor. But in Kufsky, the Tax Court makes it clear that this this strategy won't work for a shareholder who received dividends from a tax-debtor corporation because "the right of a shareholder to receive a dividend flows from his or her status as a shareholder and not from any consideration that the shareholder may have given."

This article first examines the mechanics of section 160 of Canada's Income Tax Act. It then discusses the Tax Court's Kufsky decision and offers pro tax tips from our top Canadian tax lawyers on avoiding and disputing section 160 assessments.

The Mechanics of Section 160 of Canada's Income Tax Act

Section 160 applies if all the following four conditions are satisfied:

• A property was transferred. The language of section 160 contemplates a broad range of transfers: it covers situations where a tax debtor "transferred property, either directly or indirectly, by means of a trust or by any other means whatever."
• At the time of the transfer, the transferor owed a tax debt to the Canada Revenue Agency.
• The recipient was, at the time of the transfer, one of the following: (a) the transferor's spouse or common-law partner (or a person who has since become the transferor's spouse or common-law partner); (b) a person who was under 18 years of age; or (c) a person with whom the transferor was not dealing at arm's length-e.g., a trust or corporation in which the transferor has an interest.
• The recipient paid the transferor less than fair market value for the transferred property.

In other words, section 160 will catch a transaction whereby you received assets from a related party with outstanding tax debts, and you didn't provide full consideration in return-e.g., a dividend from a tax-debtor corporation, a gift of cryptocurrency or non-fungible tokens from a friend or relative with tax debts, etc.

When section 160 applies, the transferor and the recipient both become "jointly and severally" liable for the transferor's tax debt. As such, the recipient becomes independently liable for the transferor's tax debt at the time of the transfer. This means that the Canada Revenue Agency's tax collectors can now pursue both the original tax debtor and the derivative tax debtor for the tax debt. In fact, even if the...