14 September 2016 External T.I. 2016-0638171E5 - Liability under section 159

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: What is the relevant time with respect to a legal representative’s liability under subsection 159(1)?

Position: A legal representative is jointly and severally or solidarily liable, at any time, to pay each amount payable under the Act by a taxpayer that remains unpaid, to the extent that the legal representative is in possession or control of property that belongs to the taxpayer or was held for the benefit of the taxpayer.

Reasons: The preamble to subsection 159(1) establishes a person’s liability to be any time the person is considered a taxpayer’s legal representative.

XXXXXXXXXX							2016-063817
								J. Ouimet, CPA, CA
September 14, 2016

Dear XXXXXXXXXX:

Subject: Liability under section 159(1)

This is in response to your letter dated March 18, 2016, requesting our views regarding the liability of a legal representative under paragraph 159(1)(a) of the Income Tax Act (the “Act”).

Specifically, you ask us to confirm

(a) the relevant time for determining the property in the possession of the legal representative for the purposes of subparagraph 159(1)(a)(i) of the Act; and

(b) that as long as the legal representative does not dispose of any of the property held at such relevant time except for the purposes of liquidating such property for the purpose of satisfying the unpaid amount owed by the taxpayer, the legal representative’s liability under subsection 159(1) of the Act will be limited to the proceeds received on an arm’s length sale of such property.

In your letter, you described a hypothetical example that we have summarized in the following paragraph.

A person is a trustee (the “Trustee”) of a trust that holds a portfolio of publicly listed securities (the “Portfolio”) with a fair market value of $125,000 on December 31, 2014. An individual taxpayer (the “Taxpayer”) is the sole beneficiary of the trust. The Trustee is the legal representative for the Taxpayer for purposes of section 159 of the Act. The Taxpayer filed an income tax return for the 2014 taxation year that was assessed on April 30, 2015, establishing an amount payable on that date of $150,000. No payments were made by the Taxpayer with respect to the amount payable. On April 30, 2015, the Portfolio has a fair market value of $100,000. Between April 30, 2015 and December 31, 2015, the trust acquired additional investments for the Portfolio. On January 1, 2016, a demand to pay was issued to the Trustee with respect to the Taxpayer’s unpaid amount owing. On January 7, 2016, the Trustee liquidates the Portfolio and applies the net proceeds from the liquidation of $70,000 in satisfaction of the demand to pay. However, as a result of the overall decline in the fair market value of the Portfolio, the net proceeds applied in satisfaction of the demand to pay are less than the unpaid amount owed by the Taxpayer. You also advised that the Trustee did not distribute any property of the trust at any time prior to the date the trust property was liquidated.

In your letter, you suggest that the comments in our document 9916865 appear inconsistent with the comments provided in the Department of Finance Technical Notes (the “Technical Notes”) regarding the time the Trustee becomes jointly and severally, or solidarily liable to pay the unpaid amount owing under subsection 159(1) of the Act. In this regard, you submit that document 9916865 refers to a legal representative’s liability being determined “at the time an amount becomes payable under the Act”, which would be April 30, 2015, in the hypothetical example. By contrast, you indicate that the Technical Notes suggest that a legal representative’s liability is determined “at the time that person is called upon to make a payment on behalf of the taxpayer”, which would be January 1, 2016, in the hypothetical example.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings.

Paragraph 159(1)(a) of the Act provides that a legal representative of a taxpayer at any time is jointly and severally or solidarily liable with the taxpayer to pay each amount payable under the Act by the taxpayer at or before that time and that remains unpaid, to the extent that the legal representative is at that time in possession or control, in the capacity of legal representative, of property that belongs or belonged to or was held for the benefit of the taxpayer or the taxpayer’s estate, and to perform any obligation or duty imposed under the Act. By virtue of the preamble to subsection 159(1) of the Act, “where a person is a legal representative of a taxpayer at any time,” the person becomes jointly liable with the taxpayer to pay each amount payable by the taxpayer at or before that time that remains unpaid.

Document 9916865 commented on the extent of a legal representative’s liability under subsection 159(1) of the Act in the context of a lawyer or law firm acting on behalf of a client in a commercial transaction. In the document, we were asked if such lawyer or law firm was considered a legal representative as defined in subsection 248(1) of the Act, is the “amount payable under this Act” by the taxpayer restricted to the assessed tax liability of the taxpayer for previous taxation years. We were also asked whether there is an “amount payable” under subsection 159(1) of the Act in respect of the commercial transaction relating to the funds held in the lawyer’s or law firm’s trust accounts to close the commercial transaction prior to the taxpayer’s balance-due-date and/or prior to a return of income actually being filed and/or assessed for the taxpayer’s taxation year in which the commercial transaction occurred.

In that document, we opined that if the lawyer or law firm is the legal representative of a taxpayer, the “amount payable under this Act” is any assessed tax liability of the taxpayer that remains unpaid at the time the lawyer or law firm was the taxpayer’s legal representative and at which time it was in possession of the taxpayer’s property. Moreover, we opined that if a certificate from the Minister pursuant to subsection 159(2) is not obtained, the legal representative is personally liable for the payment of all amounts for which the taxpayer is or can reasonably be expected to become liable under the Act at or before the time a distribution is made, and for the payment of which the legal representative can reasonably be expected to become liable in that capacity. However, under subparagraph 159(1)(a)(i), a legal representative’s liability is limited to the property in his or her possession or control, in the capacity of legal representative, at the time that an amount becomes payable under the Act.

In our view the comments from document 9916865 are consistent with both the wording in subsection 159(1) of the Act as well as the Technical Notes. Accordingly, it is our view that a legal representative’s liability, in their capacity as such, can commence at any time a taxpayer has an amount owing under the Act that remains unpaid.

In the hypothetical example described above, since the Taxpayer has an amount payable of $150,000 established on April 30, 2015, that remains unpaid, the Trustee is jointly and severally, or solidarily liable with the Taxpayer, to pay the amount owing by the Taxpayer at that time. Moreover, the Trustee remains jointly and severally or solidarily liable with the taxpayer at the time when the Minister makes a demand on the Trustee for payment (i.e., January 1, 2016) and any other time the amount owing by the Taxpayer remains unpaid while the Trustee remains the taxpayer’s legal representative.

Furthermore, the Trustee’s liability is limited to the property in the Trustee’s possession or control, in the capacity of legal representative, that belongs or belonged to, or that is or was held for the benefit of the Taxpayer. In the hypothetical example described herein, the Trustee’s liability is restricted to the property in the trust (i.e., the Portfolio), notwithstanding that between the time the taxpayer’s liability arose on April 30, 2015 and the time the Trustee liquidated the Portfolio in satisfaction of the demand to pay on January 7, 2016, the value of such property declined in value from $100,000 to $70,000.

We trust our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch