Jamie Golombek: A current tax case deemed a spouse accountable for the tax debt of her husband underneath the joint legal responsibility rule
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Should you owe cash to the Canada Income Company, it’s fairly exhausting to keep away from paying up. The truth is, even when it’s your partner or accomplice that owes the CRA cash, relying on the circumstances, you could possibly be held personally accountable for paying your partner’s tax money owed. A current tax case, determined earlier this month, reveals how the CRA can invoke the “joint legal responsibility rule” in part 160 of the Revenue Tax Act to gather a tax debt.
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Earlier than delving into the main points of this newest case, let’s evaluate what the regulation says concerning the tax money owed of others. Below the joint legal responsibility rule, the CRA has the facility to carry a person accountable 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 — sometimes blood relations, a partner or common-law accomplice — in addition to a company 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 enough 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 almost six years, the taxpayer was assessed underneath part 160 of the Tax Act on the idea 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 totally different transfers of property to his spouse totaling $10,650. These transfers have been made by cheques from the husband’s private checking account to the taxpayer’s private checking account. Since they have 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 court docket, 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 have been repayments of these loans.”
The decide remarked that so as to have the ability to justify the taxpayer’s “self-serving assertion” that the transfers have been mortgage repayments and never mere transfers of money, there wanted to be both some type of documentary proof, or possibly even testimony from the husband in court docket.
The one documentary proof offered to help the taxpayer’s assertion is the truth that the memo traces on the cheques include 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 decide acknowledged that “monetary preparations between spouses are usually looser than monetary preparations between third events.” Due to that, he didn’t count on there to be in depth documentation, since loans between spouses are “the exception, not the rule.” However, when such loans are made, the decide 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 decide stated, he would have wished to see proof of cheques with related memo traces going from the taxpayer to her husband when the loans have 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, performing because the taxpayer’s agent in court docket, contacted her father by telephone and reported that he had documentary proof at residence that may present that his money owed have been lower than $10,650. Primarily based on this, the decide agreed to adjourn the listening to of the enchantment and permit the spouse to re-open her proof with a view 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 to work with the court docket to discover a manner for the listening to to proceed.
Within the intervening years, the taxpayer turned very sick, however her presence wasn’t truly required in court docket for the case to proceed. The decide was merely in search of 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 decide gave the taxpayer three choices: proceed the trial in March 2025, when she may 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 decide 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 court docket, at which level the decide was left with no selection however to resolve the case based mostly on the proof offered thus far. The decide drew an “antagonistic 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 decide subsequently discovered the taxpayer accountable 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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