Cascading Derivative Assessments And Preconditions To Liability Under Sections 160 And 227.1 Of The Income Tax Act: Colitto v. Her Majesty The Queen, 2019 TCC 88

In a recent decision of the Tax Court of Canada (the "TCC"), Colitto v. Her Majesty the Queen, 2019 TCC 88 [Colitto], the TCC had the opportunity to consider a situation involving a cascading assessment involving a husband and wife under section 160 of the Income Tax Act, RSC 1985, c 1 (5th Supp) [Act]. The section 160 assessment against Ms. Colitto was based on her husband's director's liability assessment under section 227.1 for unpaid source deductions by a corporation in which the husband was a director and shareholder. The decision is important for at least three reasons. First, it overrides a line of case authority and confirms that liability under the director's liability provisions of the Act only arises when the relevant preconditions under subsection 227.1(2) of the Act are satisfied. Second, Colitto confirms that once liability under subsection 227.1 is crystalized, it is not retroactive to the time of the underlying failure to remit by the corporate taxpayer. Third, the decision confirms that liability under section 227.1 of the Act is not dependent on intent, or lack of intent, to defeat the Minister of National Revenue's (the "Minister") collection efforts under subsection by 227.1 by transferring assets. Accordingly, Colitto provides a new defence and a potential measure of relief to taxpayers facing the draconian and harsh application of these two provisions of the Act.

The Act contemplates certain circumstances wherein the Minister can collect an amount owed by one taxpayer from another person. Section 160 of the Act permits the Minister to collect taxes owing by an individual transferor with unpaid tax liability from a non-arm's length transferee who has received money or other property for no consideration or consideration of less value. Similarly, by virtue of section 227.1 of the Act, the Minister may collect taxes from a director owing by a corporation due to the corporation's failure to remit source deductions. The cascading derivative assessment in Colitto required the TCC to re-examine the operation and interplay between these two important provisions of the Act.

Throughout the period of February 2008 to August 2008, Precision Technologies Ltd. ("Precision"), a corporation of which Mr. Colitto acted as a director, failed to remit source deductions. In May of 2008, Mr. Colitto transferred an interest in two real properties (collectively, the "Properties") to his wife, Mrs. Colitto, for nominal consideration. On October 10, 2008, the Canada Revenue Agency (the "CRA") issued an assessment to Precision for failure to remit and Precision's tax debt was ultimately registered via a...