Introducing CaseNotes

As tax practitioners, a good chunk of our careers are spent keeping up-to-date on changes in tax law. Changes can arise from legislative amendments, case law that helps to interpret complex statutes or interpretations on legislation from the tax administrator—the Canada Revenue Agency (Canada) or the Internal Revenue Service (United States). In the midst of keeping current, we routinely come across interesting material that we share with clients and colleagues. It occurred to us that this material should be routinely and broadly shared. And thus, the lightbulb went on—why not create a companion to our firm's blogs that is regular and recurring—bi-weekly—and essentially shares with our friends our recent learnings that are relevant to our clients. Accordingly, welcome to CaseNotes—our firm's attempt to share with you in short, recurring, and in plain English as possible, our lightbulb moments. We hope you enjoy it!

Colitto v. The Queen, 2016-3168(IT)G, by Dallas Kleckner

In the recent Tax Court of Canada decision of Colitto v. The Queen, the Court was tasked with examining the interplay between section 160 and 227.1 of the Income Tax Act (the "Act"). Each section, described further below, permits the Minister of National Revenue (the "Minister") to collect tax debts owed by one taxpayer from another provided certain criteria are met. In the instant case, Mr. Colitto was assessed under the director liability provision of section 227.1 for failing to remit source deductions on behalf of his corporation. Subsequently, a transfer of property between Mr. Colitto and his spouse, Ms. Colitto, prompted the Minister to issue a notice of assessment against Ms. Colitto under section 160 for Mr. Colitto's purported tax liability. Prior to this decision, the application of these provisions, in combination, had not received judicial consideration.

Facts:

February 2008 to August 2008 - Corporation fails to remit source deductions; May 2, 2008 - Mr. Colitto transfers an interest in real property to his wife Ms. Colitto for nominal consideration; October 10, 2008 - Corporation is issued Notice of Assessment; November 23, 2010 - Direction to enforce writ for the unpaid tax debt is filed with Federal Court; January 4, 2011 - Writ of seizure executed by Sheriff and returned unsatisfied; March 28, 2011 - Mr. Colitto assessed under section 227.1 of the Act; and January 13, 2016 - Ms. Colitto assessed under section 160 of the Act. Issue:

Is Ms. Colitto jointly and severally liable with Mr. Colitto pursuant to section 227.1 and paragraph 160(1)(e) of the Act in respect of the May 2, 2008, transfers of property?

Held:

No. Section 160 requires the transferor to be liable for tax in the [transferor's] taxation year in which the transfer is made. However, until such time that the preconditions set out in subsection 227.1(2) are met, no liability exists.

Discussion:

Sections 160 targets situations whereby a tax debtor transfers property to a non-arm's length person and the consideration paid for said property is less than fair market value. Subsection 227.1(1) provides the authority upon which the Minister may assess directors for the failure to remit certain amounts (i.e. source deductions) provided the preconditions in subsection (2) are satisfied.

The determination of liability in the instant case was dependent upon whether an assessment under section 227.1 was in respect of Mr. Colitto's taxation year in which the property was transferred. More specifically, the Court was required to opine on the timing of liability under section 227.1, and how that timing relates to an assessment under section 160. The Court reviewed relevant caselaw, including Livingston v. Canada, 2008 FCA 89 ("Livingston"), a binding Federal Court of Appeal decision in which the court pronounced a four-part test when determining liability under subsection 160(1).

The Court discussed at length the first criteria in the Livingston decision, being, that "[t]he transferor must be liable to pay tax under the Act at the time of transfer". Whether a liability existed [to the transferor, Mr. Colitto] at the time of transfer required the Court to undertake an in-depth statutory interpretation of section 227.1. Ultimately, the Court held that the text used in subsection 227.1 was unambiguous, requiring the preconditions in that section be satisfied prior to establishing liability. The Court also declared that there was also no language in that section to suggests that the liability, once established, should apply retroactively.

On January 4, 2011, the Corporation's debt was executed and returned unsatisfied, fulfilling the precondition, and triggering Mr. Colitto's tax liability. In order for subsection 160(1) to apply, the transferor, Mr. Colitto, must have been liable for the tax in his taxation year in which the transfers took place (2008). Given that the liability under section 227.1 did not arise until 2011, the transfers were not caught by section 160 of the...