11 October 2011 Internal T.I. 2011-0402401I7 - s.160 Assessment on Mortgage Payments

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 section 160 applies to assess the owner of a home whose equity in the home has increased following payments made against the home's mortgage by a taxpayer with arrears of taxes.

Position: Yes.

Reasons: See below.

								October 11, 2011

	Toronto North TSO					HEADQUARTERS
	Revenue Collections				Income Tax Rulings
								  Directorate
	Attention: Don Alton, Assistant Director	Richard Aronoff
	Revenue Collections Division			(613) 941-7239

								2011-040240

Section 160 in Respect of Payments on a Mortgage

This is in response to the email from Randy Reynolds concerning the application of subsection 160(1) of the Income Tax Act (the "Act") which provides for tax liability arising from a non-arm's length transfer of property.

The fact situation involves a taxpayer with a significant tax liability who operated an XXXXXXXXXX repair business as a sole proprietorship. This business ceased operating as a proprietorship and subsequently began to operate as an incorporated company under the same business name. The sole director of the corporation is the taxpayer's father. The taxpayer has no known assets. Both he and his father reside at a property owned entirely by the father that has a mortgage registered against title. The mortgagor is the father with payment of the liability being guaranteed by the taxpayer's brother. A review of the sole proprietorship's bank account revealed that three of the cheques issued in a single year were payments that were applied to reduce the outstanding amount of the mortgage. These payments were made at a time when the taxpayer had outstanding tax liabilities.

At issue is whether the taxpayer's father and brother can each be assessed under subsection 160(1) for the payments made by the sole proprietorship, which reduced the outstanding balance of the mortgage.

Under subsection 160(1) of the Act, a transferee, in receipt of property from a transferor with whom there is no arm's length relationship, is jointly and severally liable with the transferor for that person's tax liability. The amount of the transferee's liability is equal to the lesser of the fair market value of the property transferred less the consideration paid, and the transferor's total tax liability owing in the year of the transfer or any preceding year.

The purpose of section 160 is to prevent a taxpayer from avoiding paying a tax liability by transferring property to non-arm's length persons. Under paragraph 251(1)(a) related persons are deemed not to deal with each other at arm's length. Further, paragraph 251(2)(a) provides that individuals who are connected by blood relationship, marriage or common-law partnership or adoption are considered, for purposes of the Act, to be persons who are related to each other Subsection 160(2) is the authority to issue the assessment against the transferee, and provides that it may be raised at any time. Subsection 160(2) also provides that once the assessment has been raised, it is treated as though it were made under section 152.

A payment by one party that reduces the principal amount of a mortgage owing by another party is considered a transfer of property, albeit indirect, for purposes of subsection 160(1) (see Medland v. The Queen, [1999] 4 C.T.C. 293, 98 DTC 6358 (F.C.A.), aff'g [1997] 1 C.T.C. 2702 (T.C.C.)). The Federal Court of Appeal in The Queen v. Ducharme, [2005] 2 C.T.C. 323, 2005 DTC 5249, aff'g [2004] 2 C.T.C. 2624, 2004 DTC 2283 (T.C.C.), determined that the monthly mortgage payments made by the common-law husband constituted rent for the availability and use of the house that was owned and mortgaged by his common-law wife. In the present situation, the payments made by the taxpayer to his father were not periodic. The three payments that the taxpayer made and which were applied to reduce the outstanding amount of the mortgage were made in a single year. Consequently, while the taxpayer resided at a property owned entirely by the father, it would be difficult to characterize the three payments as rent.

In the present case, there is no domestic service obligation for which the payments by the taxpayer can be viewed as constituting consideration. Further, these payments were not for household expenses (see Williams v. The Queen, [2003] 1 C.T.C. 223, 2002 DTC 7463 (F.C.A.), aff'g [2000] 4 C.T.C. 2115 (T.C.C.), and Yates v. The Queen, [2009] 3 C.T.C. 183, 2009 DTC 5062 (F.C.A.), aff'g [2008] 1 C.T.C. 2618, 2007 DTC 1446 (T.C.C.)). The father could, therefore, be assessed for the lesser of the full amount of the sum of the three payments and the outstanding tax liability of the taxpayer in the year the payments were made or any preceding year.

Concerning the taxpayer's brother, the liability on his guarantee is contingent on default by the father. While this brother's risk exposure decreased as a result of the payments by the sole proprietorship, no property was transferred to him. Consequently, no section 160 assessment can be made against the brother as a result of these payments.

Should you have any questions or require additional information, please do not hesitate to telephone Richard Aronoff at the number provided above.

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

cc. Randy Reynolds
Revenue Collections Division
Toronto North TSO