If you owe back taxes to the Canada Revenue Agency and hope to avoid paying up by simply transferring your assets to your spouse, partner or relative, be forewarned — the taxman can seek the funds directly from your relative.
Under the “joint liability rule,” the CRA has the ability to hold another individual liable for the tax debts of someone with whom they have a non-arm’s length relationship if they’ve been involved in a transaction that was undertaken to avoid tax.
“Non-arm’s length” refers to individuals who are related, typically blood relatives, spouses or common-law partners, as well as a corporation and its shareholders, and anyone else whom the CRA believes is factually not at arm’s length with each other.
For the CRA to successfully win a joint-liability assessment, four criteria must be met:
- there must have been a transfer of property,
- the transferor and the transferee must not have been dealing at arm’s length,
- there must not have been adequate consideration paid by the transferee to the transferor and, finally,
- the transferor must have had an outstanding tax liability at the time of the transfer.
The most common example of such a transaction is where a spouse, say, the husband, transfers his half-interest in the matrimonial home to his wife for no consideration, leaving the husband with no assets for the CRA to seize for his tax arrears. The wife can then be assessed by the CRA for the value transferred (net of any mortgage), and her assets, including her bank accounts and investment portfolio, can be seized to satisfy this debt, up to the amount transferred.