Case Commentary: Csak v the King 2024 TCC – Transfers of property while owing taxes to the CRA (Tax Court Finds Both 1988 and 1989 Reassessments of Maria Csak Statue-Barred)

Introduction – receiving property from a spouse with tax debt

A taxpayer faced with tax debt may try to protect his or her assets by transferring the assets to family members. This would typically trigger subsection 160(1) of the Income Tax Act (“Tax Act”), which is designed to prevent taxpayers from circumventing tax liability in this manner. If caught under subsection 160(1), then the transferee could be assessed by the Canada Revenue Agency (“CRA”) and become liable for taxes. This was Maria Csak’s situation in Csak v the King, where the CRA had assessed her in 2012 for a property transferred to her in 1993 by her now deceased husband, Charles Csak.

Maria appealed the assessments to the Tax Court of Canada (“Tax Court”). Her appeal brought forth two arguments against the assessment. First, that consideration was given in exchange for the property received. Second, that the underlying assessments against Charles were statute-barred. The Tax Court agreed with Maria’s second defence, thus allowing the appeal, and referring the reassessments back to the CRA for reconsideration.

Background – Charles’ underlying reassessments and transfer of property to Maria

Maria married Charles in October 1992, the transfer of property occurred on January 8, 1993, and Charles passed away on March 9, 2002. The basis of the CRA’s assessment was the transfer of property, which had a fair market value of $1,200,000, to Maria at a time when Charles owed $536,625 under the Tax Act for his 1988 through 1991 taxation years.

The CRA had reassessed Charles in 1994 for his years 1988 to 1991 tax years and disallowed partnership losses. Charles appealed the reassessments, and the appeal was still ongoing at the time of his death. His estate took over the appeal after his death with Maria as the estate’s executrix.

The CRA made several assumptions of facts when assessing Maria. This included key points, such as, the absence of consideration for the property transfer; the appellant’s role as executrix and/or trustee of Charles’ estate; Charles’ unpaid tax liability; the underlying assessments disallowing partnership losses; and the existence of waivers to the normal reassessment periods for the 1988 and 1989 tax years signed by Charles.

Maria disputed certain assumptions of fact made by the CRA. This included the fact that no consideration was given for the property transfer, her involvement in the appeal process, and her awareness of the tax appeal before Charles’ death. Maria also expressed doubt about the authenticity of Csak’s signature on the 1988 waiver.

Maria testified that her agreement to marry Charles and to care for him was consideration for the transferred property. However, this arrangement was not recorded in written documents. Furthermore, she had signed an Affidavit of Residence and Value of Consideration (“Affidavit”) for the property, which stated that the transfer of property was “for natural love and affection from husband to wife and there is no consideration therefore no land transfer tax is exigible.”

Subsection 160(1) and tax liability from property transfers

Subsection 160(1) of the Tax Act deals with tax liability related to property transfers not at arm’s length. The subsection is meant to safeguard tax revenues against potential losses resulting from property transfers between non-arm’s length parties at values below fair market value. The Tax Court’s role in these cases is to determine the correctness of the assessment under subsection 160(1), not to protect government revenue.

When a person transfers property to a non-arm’s length individual, subsection 160(1) makes both the transferor and the transferee become jointly and severally liable for the transferor’s tax obligations for the relevant taxation year. Under paragraph 160(1)(e), the transferee’s liability is limited to the excess of the fair market value of the property transferred over the fair market value of the consideration given for the property.

On January 8, 1993, Charles transferred property to Maria, who at the time of the transfer was the spouse of Charles. This met the conditions stated in the first part of subsection 160(1) and was uncontested by Maria.

Maria’s defences – consideration and statute-barred reassessments

Maria raised two arguments against the assessments. The first was that she had given consideration in exchange for the property. The second was that the underlying reassessments against Charles were statute barred and should be vacated along with her assessment.

a) Was consideration provided by Maria for the property?

Maria argued that the transfer of the property to her was in exchange for Maria agreeing to marry and care for Charles. The Tax Court split the analysis of whether this qualified as consideration into two parts. First, the Tax Court examined whether the documentary evidence supported there being consideration. Second, the Tax Court examined whether Maria’s agreement to marry and care for Charles could be consideration.

For the first part, the Tax Court found that the documentary evidence supported there being no consideration. Maria acknowledged that she did not have an agreement in writing with Charles that addressed consideration for the transfer of the property. The only pieces of evidence in writing relating to the transfer of the property from Charles to Maria were the deed and Affidavit for the property. The deed did not address the consideration for the transfer of the property. The Affidavit stated that Maria paid no consideration for the property, and that its transfer was for natural love and affection from husband to wife. Based on these documents the Tax Court found that Maria gave no consideration for the property.

For the second part, the Tax Court found that Maria’s agreement to marry and care for Charles could not be consideration. The transfer of property occurred after the two were married. There was also no evidence of a legally binding agreement identifying the marriage as consideration, as well as no evidence of the fair market value of such a promise. Thus, the Tax Court found that a promise to marry that had already been fulfilled cannot be consideration for the property. With respect to the agreement to care for Charles, Maria indicated that it was only afterwards that she ascertained the level of work involved in caring for Charles. There was no evidence of a legally binding agreement identifying future care of Charles as consideration for the property, and there was no evidence regarding the value of such future care. Therefore, the Tax Court concluded that Maria’s agreement to marry and care for Charles were not consideration for the property.

b) Were the reassessments statute barred?

Maria argued that the reassessments were past the normal period reassessment period. This period is set out in subsection 152(3.1) of the Tax Act and allows the CRA three or four years depending on whether the taxpayer is an individual, mutual trust, or corporation. For individuals the period is three years from the day of sending a notice of assessment. This period may be extended in certain circumstances, such as where the taxpayer has committed fraud or made misrepresentations. Additionally, the CRA may request a signed waiver from the taxpayer to extend the period.

The Tax Court’s analysis of this issue started with applying the principles found in Federal Court of Appeal case of Gaucher v. Her Majesty the Queen. Gaucher was a similar case where Gaucher’s former husband was assessed for approximately $350,000 of tax and had transferred a residence to her after the assessment was confirmed by the Tax Court. She was later assessed by the CRA and appealed her assessment to Tax Court. Her appeal was denied, but this was subsequently overturned at the Federal Court of Appeal. The Federal Court of Appeal found that there was “a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties.” That when assessing the transferee through subsection 160(1), that “second person must have a full right of defence to challenge the assessment made against her, including an attack on the primary assessment on which the second person’s assessment is based.”

In the case at hand the CRA argued that Maria was a party to Charles’ appeal through her capacity as executrix of Charles’ estate. The Tax Court disagreed with this characterization and found that Maria was not a party to the appeal and that the estate was not listed in the style of cause for the judgement and reasons. That even if the estate was a de facto party to the appeal, Maria’s role in the appeal was in her capacity as the personal representative of the estate. The appeal did not purport to impose liability on Maria even after she became the executrix of the estate. The Tax Court found that, while she fulfilled her role as executrix, Maria did not understand the appeal. Furthermore, the notices of appeal were filed in 1996, which was approximately six years prior to Charles’ death. The CRA argued that Maria became responsible for raising a statute-barred issue following Charles’ death solely because she was the executrix of the estate. The Tax Court found this to be “simply not tenable” given that the issue arose from the expiry of the normal reassessment periods for the 1988 and 1989 taxation years in 1992 and 1993 and given that Charles’ appeal was filed some six years prior to his death.

The CRA also argued that the doctrines of res judicata and abuse of process precludes Maria from raising the argument that the reassessments were statute barred. For res judicata, the CRA specifically invoked that estoppel applied to her appeal. The Canadian tax litigation lawyer for CRA identified three requirements that needed to be met for there to be a finding of estoppel or abuse of process, but the Tax Court only addressed the first and third requirement. The first requirement was that the issue in the appeal must be the same as the one decided in the prior decision. The third requirement identified by the CRA was that the parties to both proceedings must be the same or their privies.

The Tax Court had already identified that the appeal fell within Maria’s right to challenge the reassessments as required as “a basic rule of natural justice.” The Tax Court considered the CRA’s line of argument that estoppel should apply to be misguided. Nevertheless, the Tax Court addressed the first and third requirements identified by the CRA.

For the first requirement, the Tax Court found that the issues raised in the two appeals were not the same. Maria’s appeal raised the issue that the reassessments were statute-barred and thus should not be considered for the assessment under subsection 160(1). Whereas the issue decided in Charles’ appeal was whether the reassessments were correct. A reassessment that is statute-barred is null and void making the determination of whether such a reassessment is correct moot. This difference is also highlighted by the distinct burdens of proof. A statute-barred issue places a burden of proof on the CRA while a correctness issue places a burden of proof on the taxpayer.

For the third requirement, the Tax Court found that the appeals consisted of different parties to both proceedings. The parties in this appeal are not the same as the parties in Charles’ appeal. Moreover, Maria was not a privy of Charles’ as she had no personal interest in the subject matter of Charles’ income tax appeal even though she was the executrix and beneficiary of his estate. Thus, neither the first nor third requirements were met.

The Tax Court found that this conclusion was not unfair to the CRA. The CRA was fully notified of the statute‑barred issue in this appeal and presented evidence to address that issue. Maria, on the other hand, would be prejudiced if she could not raise that issue in this appeal. Furthermore, the Tax Court recognized that the passing of time may have impacted the ability of the CRA to meet the burden of proof regarding the waivers. However, the CRA was the one that initiated the assessments of Maria nearly 20 years after the transfer and the expiration of the applicable normal reassessment periods, and not from any action or inaction by Maria. Thus, Maria was allowed to raise the argument that the reassessments were statute-barred and not saved by the waivers signed by Charles.

The CRA argued that two waivers, one for the 1988 tax year and another for the 1989 tax year, were signed by Charles and extended the reassessment period. The reassessments occurred on April 21, 1994, and without the waivers the reassessments would be considered outside of the normal reassessment period. The Tax Court found issues with the waivers that led the Tax Court to find that the waivers were not properly filed. Thus, the waivers could not be used to extend the reassessment period making the reassessments statute barred.

Maria had contested the authenticity of Charles’ signature on the 1988 waiver. The Tax Court, despite noticing a certain firmness in the signature not in other documents, found that the signature was sufficiently similar to conclude that Charles had signed the waiver. Additionally, there was a discrepancy in the handwritten address, but this did not invalidate the waiver either. The main issue that the Tax Court identified with the waiver was ambiguity regarding when the waiver was filed with the CRA.

Despite testimony from CRA employees that the 1988 waiver was in the same physical file as other documents related to Charles’ waiver in 2019, the lack of evidence showing they were a single multi-page document or received simultaneously prevented the CRA from establishing the filing date. The absence of a “received” stamp on the 1988 waiver, coupled with mailroom policies, raised concerns for the Tax Court. Overall, the Tax Court found that there was insufficient evidence to determine the date of the 1988 waiver’s receipt by the CRA, thus deeming the 1988 reassessment statute barred.

The 1989 waiver also had a flaw with its filing. While the waiver was stamped, the filing date of the stamp suggests that the hand-delivery of the waiver was after the normal reassessment period. The CRA argued that section 26 of the Interpretation Act should extend the filing deadline. However, the Tax Court disagreed, asserting that section 26 did not apply to waive a taxpayer’s right. The taxpayer’s right to file a waiver is not constrained by a specific time limit, and the purpose of section 26 is inconsistent with deeming a waiver filed within the normal reassessment period. Consequently, the Tax Court found that the 1989 reassessment was statute barred. Maria’s subsection 160(1) assessment was reduced as both reassessments were statute-barred and excluded from her assessment.

Pro tax tips – Updates to Section 160

The Tax Court used the language of the subsection at the time of the assessments, but section 160 has undergone some changes since Maria’s appeal. Most importantly these changes include new anti-avoidance rules in paragraphs 160(5)(a) and (b) that are designed to prevent the reduction of the transferee’s tax liability. Having an experienced Canadian tax lawyer advise you on an intended transfer would be advisable. A Canadian tax lawyer would be able to identify issues, such as the applicability of subsection 160(1), and recommend the best course of action from a tax perspective to fulfill your goals.

Frequently Asked Questions

How would giving consideration reduce my tax liability under subsection 160(1)? What should I do to prove that consideration was provided?

Assessments under subsection 160(1) are limited in the amount of tax liability that can be attributed to the transferee. The tax liability for the transferee would be the lesser of either the value of the property at the time of the transfer and less the value of consideration, or the amount of tax debt owing. Thus, the assessment can be limited by the amount by which the transferor’s tax debt exceeds the value of the consideration given. Having proper written documentary evidence of the consideration was provided for the property, and the value of the consideration, would provide one avenue to reduce the amount owing. Prior to the transfer, consulting with a top Tax Lawyer would be valuable as a lawyer can advise on the appropriate documentation, such as valuation reports, for protecting against tax liability.

Would subsection 160(1) apply if I transfer a property through a trust?

Subsection 160(1) is worded to capture transfers done directly or indirectly through a trust. Thus, if the conditions of subsection 160(1) are met then the transferor and transferee could be held jointly and severally liable regardless of whether there is a trust involved. An expert tax lawyer would be able to advise you whether a transaction you are considering making is likely to trigger the subsection.

DISCLAIMER:

This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.