Navigating the Rules of Spousal Liability for Tax Arrears: A Guide to Section 160 of the ITA

Denis Grigoras

Denis is a lawyer who draws on his background in complex legal disputes and transactions to problem-solve for his clients.

Have you ever given any thought to the possibility of transferring some of your property to your spouse or common-law partner? If you owe tax debt, it is imperative that you are familiar with the rules that are outlined in Section 160 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). (“ITA”).  The Canada Revenue Agency (CRA) has the authority under this provision to hold both the transferor and the transferee jointly and severally liable for any unpaid taxes that exist at the time of the property transfer.

This means that if you transfer property to your spouse or common-law partner when you have an outstanding tax obligation, you and your spouse or common-law partner could be held liable for the entire tax debt. Even in the event that the spouse who is in default has initiated the bankruptcy process, the spouse who is not in default may still be susceptible to a claim under Section 160 brought by the CRA. Make sure you know whether your spouse has tax arrears; if so, the tax obligation should be resolved first or, alternatively, accounted for in the computation of the transfer.

If you are looking to make a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), you may try to include a provision that restricts the applicability of the remedial provisions of Sections 95 and 96 of the BIA; alternatively, you as the debtor/transferor may have successfully overcome the threshold requirements in Sections 95 and 96 such that they don’t apply. For example, the period of time in which transfers scrutinized under Sections 95 and 96 of the BIA has lapsed.

As a side note, related to Sections 95 and 96 of the BIA, for many years, the law has recognized the importance of protecting creditors from debtors who are insolvent and try to give away their assets to third parties instead of using those assets to pay off their debts.  Legislation prohibiting debtors from fraudulently giving away assets in order to avoid paying debts has existed for centuries. This type of behavior was first made illegal in England during the reign of Queen Elizabeth I in the 1500s and has been prohibited in Ontario’s Fraudulent Conveyances Act since the late 1800s. The principle behind this prohibition was stated in the 1870 case of Freeman v. Pope, in which Lord Hatherley LC said, “[a] debtor must be just before he can be generous – and that debts must be paid before gifts can be made.” Sections 95 and 96 of the BIA codify this “just before generous” rule.

However, a tax debtor’s ability to avoid Sections 95 and 96 of the BIA has no bearing on CRA’s authority to use Section 160 to assess the tax debtor’s spouse.  Section 160 is not subject to any limitation period (i.e., see Section 160(2) of the ITA, which states: “the Minister may at any time assess a taxpayer in respect of any amount payable because of this section…,” and Section 16(1)(i) of the Ontario Limitations Act, 2002S.O. 2002, c. 24, Sched. B, which states that “there is no limitation in respect of a proceeding to recover money owing to the Crown in respect of fines, taxes and penalties.”).

When you are preparing or reviewing a proposal, be sure to include the relevant language in the proposal in order to remove the CRA’s rights of assessment under Section 160. Protect yourself from this danger.

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