Jamie Golombek: A current tax case deemed a spouse chargeable for the tax debt of her husband below the joint legal responsibility rule
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In case you owe cash to the Canada Income Company, it’s fairly onerous to keep away from paying up. In truth, even when it’s your partner or accomplice that owes the CRA cash, relying on the circumstances, you can be held personally chargeable for paying your partner’s tax money owed. A current tax case, determined earlier this month, exhibits how the CRA can invoke the “joint legal responsibility rule” in part 160 of the Earnings Tax Act to gather a tax debt.
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Earlier than delving into the small print of this newest case, let’s evaluate what the legislation says concerning the tax money owed of others. Beneath the joint legal responsibility rule, the CRA has the ability to carry a person chargeable for the tax money owed of somebody with whom they’ve a non-arm’s size relationship in the event that they’ve been concerned in a transaction seen to keep away from tax.
“Non-arm’s size” refers to people who’re associated — usually blood relations, a partner or common-law accomplice — in addition to an organization and its shareholders, and anybody else the CRA believes is factually not at arm’s size with one another.
4 standards should be met for the CRA to efficiently win a joint-liability evaluation: there will need to have been a switch of property; the transferor and the transferee should not have been dealing at arm’s size; there should not have been satisfactory consideration paid by the transferee to the transferor; and the transferor will need to have had an excellent tax legal responsibility on the time of the switch.
Within the current case, which has been within the courts for practically six years, the taxpayer was assessed below part 160 of the Tax Act on the premise that she obtained property valued at $10,650 from her husband at a time when her husband owed greater than that quantity to the CRA. The consequence of part 160 making use of is that the transferee should pay the quantity owing to the CRA as much as the consideration they obtained from the transferor.
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Between April 2012 and June 2013 the taxpayer’s husband made 4 completely different transfers of property to his spouse totaling $10,650. These transfers had been made by cheques from the husband’s private checking account to the taxpayer’s private checking account. Since they had been married, they’re clearly non-arm’s size individuals for the needs of part 160.
The CRA took the place that the taxpayer didn’t present any consideration to her husband for the switch of the property. However in courtroom, the taxpayer argued that she offered full consideration for the switch of the property as a result of she had “beforehand lent her husband numerous quantities of cash and that the cheques in query had been repayments of these loans.”
The choose remarked that so as to have the ability to justify the taxpayer’s “self-serving assertion” that the transfers had been mortgage repayments and never mere transfers of money, there wanted to be both some type of documentary proof, or perhaps even testimony from the husband in courtroom.
The one documentary proof offered to help the taxpayer’s assertion is the truth that the memo strains on the cheques comprise the phrases “payback” or “mortgage payback.” There have been no promissory notes nor mortgage agreements, and there was no system for recording the excellent stability of those “purported” loans at any given time. The choose acknowledged that “monetary preparations between spouses are typically looser than monetary preparations between third events.” Due to that, he didn’t count on there to be intensive documentation, since loans between spouses are “the exception, not the rule.” However, when such loans are made, the choose famous that he “would count on to see (them) recorded or documented in some method past a memo line on a cheque.” At a minimal, the choose stated, he would have wished to see proof of cheques with comparable memo strains going from the taxpayer to her husband when the loans had been first superior.
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When the trial first began again in April 2019, the taxpayer didn’t name her husband as a witness as a result of he was in another country. Her daughter, appearing because the taxpayer’s agent in courtroom, contacted her father by telephone and reported that he had documentary proof at house that might present that his money owed had been lower than $10,650. Based mostly on this, the choose agreed to adjourn the listening to of the attraction and permit the spouse to re-open her proof to be able to name her husband as a witness.
Following delays as a result of COVID, the Tax Court docket scheduled the continuation of the case for October 2022. After the Court docket Registry had closed on the final enterprise day earlier than the trial was to be heard, the taxpayer requested an adjournment for medical causes.
Since that adjournment, the Tax Court docket has made quite a few unsuccessful makes an attempt to reschedule the continuation of the trial, however neither the taxpayer nor her daughter made any try and work with the courtroom to discover a means for the listening to to proceed.
Within the intervening years, the taxpayer turned very unwell, however her presence wasn’t really required in courtroom for the case to proceed. The choose was merely searching for her husband to testify as to the character or quantity of the tax debt which he had disputed was owing.
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Quick ahead to December 2024, after greater than two years of making an attempt to maneuver the case alongside, when the choose gave the taxpayer three choices: proceed the trial in March 2025, when she might name her husband as a witness; proceed the trial with out him being known as as a witness; or file written closing arguments by February 28, 2025, and the choose would resolve the end result based mostly on these submissions.
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The taxpayer didn’t reply to any of those choices, nor to a voicemail message from the courtroom, at which level the choose was left with no alternative however to resolve the case based mostly on the proof introduced so far. The choose drew an “hostile inference” from the taxpayer’s failure to provide her husband as a witness, and concluded that she didn’t achieve this as a result of he doesn’t even have the proof to help her assertion that there was no underlying tax debt. The choose subsequently discovered the taxpayer chargeable for the $10,650 of tax money owed owing by her husband.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.
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