27 January 2010 Internal T.I. 2010-0354691I7 - Shareholders' Liability for Corporate Tax

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 a shareholder assessed under subsection 15(1), could be also liable under subsection 160(1) under the same set of facts.

Position: Yes; but one is not dependent on the other.

Reasons: Subsections 15(1) and (2) are income inclusion provisions for taxation purposes, while an assessment under subsection 160(1) is a tool to collect the tax of another person.

									January 27, 2010

	Toronto West Tax Services Office			HEADQUARTERS
									Income Tax Rulings
	Attention: Gunther Czerny	   			Directorate
	                Manager, Taxpayer Services	Lindsay Frank
	                and Debt Management			(613) 948- 2227

									2010-035469

Shareholders' Liability for Corporate Tax

This is in reply to an email from Shyamila Rajaratnam. At issue, is whether a shareholder, assessed under subsection 15(1) of the Income Tax Act (the "Act"), could be held liable under subsection 160(1) for a corporation's tax debt in respect of a benefit conferred on the shareholder.

In the case at hand, XXXXXXXXXX is indebted for corporate tax in the amount of $1 million. Its sole shareholder sold the corporation's property, and appropriated the proceeds from the sale ($2.6 million) by way of a deposit in his personal bank account. Based on this fact situation, subsections 15(1) and 160(1) of the Act come into play.

Subsection 15(1) of the Act provides an income inclusion where a corporation has conferred a benefit on a shareholder of that corporation. Subsection 160(1), on the other hand, makes a person (transferee) jointly and severally liable with a tax debtor (transferor) for the transferor's tax liability. For subsection 160(1) to apply, the transferor and the transferee must not be dealing at arm's length, the transferor must have transferred property to the transferee while owing taxes, and the property must have been transferred at less than its fair market value.

In terms of not dealing at arm's length, it should be noted that subsection 251(1) deems that related persons do not deal at arm's length, while subsection 251(2) includes in the definition of "related persons" a corporation and a person who solely controls that corporation.

The facts in XXXXXXXXXX are somewhat analogous to those in Bleau v. R., 2008 D.T.C. 3100 (T.C.C.), aff'd in 2008 D.T.C. 6516 (F.C.A.). In that case, the sum of $33,691 was added to the shareholder's income as an appropriation of funds belonging to the corporation, in accordance with subsection 15(1). Additionally, since a loan of $19,553 from the corporation was not repaid before the end of the second year, an assessment under subsection 15(2) was raised concurrently. It is important to note that the amounts transferred were treated, from an accounting standpoint, as an advance to a shareholder. This treatment did not, however, negate the fact that there was a transfer for the purposes of subsection 160(1).

Considering that at the time of the appropriation and the advance (transfer) of the loan proceeds, the corporation's corporate tax was unpaid, the Court found that subsection 160(1) was applicable to the amount appropriated and the loan proceeds, notwithstanding that the same amounts were caught under the provisions of subsections 15(1) and (2).

In light of Bleau, the fact situation that gives rise to an assessment under subsection 15(1) and (2) can also give rise to an assessment under subsection 160(1). While the outcome might suggest that the two assessments constitute double taxation, that is not the case. The assessments under subsections 15(1) and (2) involve income inclusion for taxation purposes, whereas the assessment under subsection 160(1) is a collection remedy to aid in the collection of the unpaid corporate tax, see Bleau at first instance at para. 21, but see also the cautionary comment in footnote10.

Should you have any questions or require additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the telephone number provided above.

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

c.c. Shyamila Rajaratnam

Taxpayer Services and Debt Management Division
Toronto West Tax Services Office