Muir – Tax Court of Canada finds that s. 160 did not apply to moneys transferred subject to an informal arrangement to discharge liabilities of the transferor
A professional corporation sold all its assets for $1.2 million, with most of this sum being applied at closing to pay off corporate liabilities, but with the balance of $124,000 being paid to the corporation’s dentist shareholder (Ms. Muir) on the understanding that she would use this sum first to pay off remaining creditors who would have been difficult to deal with on the closing, e.g., returning trust accounts for orthodontic patients who did not want to continue with the purchaser’s dentist. As it turned out, there were a lot of unhappy patients, and all of the $124,000 was so applied. The next year, the Corporation was unexpectedly reassessed, and in due course, CRA assessed Ms. Muir under s. 160.
Boyle J found that the $124,000 had been paid to her in consideration for equivalent consideration (her taking on the discharge of the remaining Corporate obligations), so that the s. 160 assessment was vacated. He stated:
[I]t appears her patients and the Corporation’s creditors would have had legal rights to trace any of the monies involved had the Corporation transferred it to her for any other purpose … .
… I do not accept that it was the intention of Parliament or … Livingston to have section 160 apply in circumstances where CRA not only wasn’t but could never be … in any different position whatsoever as a result of the transfer.
Neal Armstrong. Summary of Muir v. The Queen, 2020 TCC 8 under s. 160(1).