12 August 2009 Internal T.I. 2009-0333851I7 - Non-Arm's Length Transfer of Property

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an assessment under section 160 is supportable in law, where a joint bank account is used to thwart collection.

Position: Yes.

Reasons: Case law.

									August 12, 2009

	Barrie Tax Services Office				HEADQUARTERS
									Lindsay Frank
	Attention:  Mike Walker, Assistant Director	(613) 948-2227
			Revenue Collections Section
									2009-033385

Section 160 Assessment Where Joint Bank Account Used to Thwart Collection

This is in reply to an email from John Brophey. At issue is whether an assessment under section 160 of the Income Tax Act ("the Act"), in respect of property transferred from a joint bank account, is supportable in law.

The facts are as follows. The wife (the transferee) is the sole owner of waterfront property valued at approximately $XXXXXXXXXX . The property is mortgaged. She does not work and declares very little income. Her husband owes taxes in excess of $XXXXXXXXXX . Every month, he receives the sum of $XXXXXXXXXX , which he deposits in a bank account on which he and his wife are co-signatories. Mr. Brophey has ascertained that the mortgage payments are being paid from that account. To date, the amount paid on the mortgage is $XXXXXXXXXX .

Section 160 of the Act imposes liability on a transferee, who has received property from a transferor indebted for an amount under the Act. Pursuant to paragraph 160(1)(e), a transferor and a transferee are jointly and severally liable to pay the former's tax debt up to the amount by which the value of the property transferred exceeds the fair market value of the consideration given by the transferee. The obligation imposed on the transferee is the amount the Minister could have seized, but for the transfer of the property.

In White v. R., [1995] 1 C.T.C. 2538, Obadia v. R., [1998] 4 C.T.C. 2504, and Laframboise v. R., [2003] 1 C.T.C. 2672, the Tax Court of Canada considered appeals from section 160 assessments. In each case, the assessment stemmed from funds deposited in a joint bank account of which the spouses were co-signatories. In White, the Court held that section 160 applied where the transferor's spouse discharged the mortgage on a house in her name from funds deposited in the account by her husband. In Obadia, no agreement was disclosed establishing any special arrangement between the transferor and the transferee as to the ownership of the money in the joint account; accordingly, section 160 applied but the assessment was varied to reflect amounts deposited by the other account holder. In Laframboise, the Court held that a deposit in a joint bank account constituted a transfer for the purposes of section 160; however, it was further held that the assessment had to be varied to allow for that portion of the amount transferred that was subsequently expended by the transferee on account of the couple's living expenses.

The foregoing finding of allowing for the deduction of living expenses in the calculation of the quantum of the assessment was consistent with the earlier decisions in Michaud v. R., [1998] 4 C.T.C. 2675 (T.C.C.) and Ferracuti v. R., [1999] 1 C.T.C. 2420 (T.C.C.); however, it was subsequently rejected in Yates v. R., [2009] 3 C.T.C. 183 (F.C.A.). In that case the Federal Court of Appeal rejected the principle in Laframboise, Michaud, and Ferracuti and held that the expenditure on account of living expenses was not consideration and did not factor into the calculation of the amount transferred.

Mr. Brophey has already determined that deposits to the joint bank account are used to pay the mortgage. Thus the tracing aspect has been satisfied. However unlikely that such a document exists, it should be determined whether the bank is in possession of any agreement stipulating how the funds deposited therein are to be used. In the absence of any agreement suggesting that the transferee is acting as agent on behalf of the transferor, the proposed section 160 assessment would be supportable in law.

Should you need for clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

B. J. Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate

c.c. John Brophey