[This first appeared in the Canadian Tax Foundation’s 2023 Ontario Tax Conference Materials]
Watts v. HMK 2023 TCC 11: Section 160 Applies to Transfer for Home Purchase
Miriam Watts (Appellant) received an indirect transfer in the 2009 taxation year of $138,550 from her husband Mr. Watts, a tax debtor at the time of transfer. Section 160 applied to the transfer. The Appellant’s appeal to the Tax Court was dismissed.
This case presents an interesting set of facts in a legal context most of us are quite familiar with. The Appellant had been married to her husband for thirty years. In 2009, Mr. Watts had an outstanding tax liability of over $400k. The relatively hefty tax bill related to Mr. Watts’ 2000, 2001, 2005, 2007 and 2009 taxation years. Inrterestingly, the Appellant did not challenge the underlying assessments against her husband.
Some of you may recognize the name Lawrence Watts. Mr. Watts carried on the business of Fiscal Arbitrators as a sole proprietorship until it ceased to operate in 2013. In October 2015, Mr. Watts was found guilty of fraud, and in June 2016, he was sentenced to six years in prison due to the conduct of his Fiscal Arbitrators business.
Section 160 Generally
Generally speaking, section 160 of the Act aims to prevent an indebted taxpayer from shielding their assets from the CRA. If a taxpayer transfers property to a non-arm’s length person while owing taxes, the recipient of the transfer is liable for the taxpayer’s tax debt.
The transferee will owe the lesser of: (a) the fair market value of the property transferred, or (b) the transferor’s debt.
The four criteria for the application of section 160 are as follows:
- The transferor must be liable to pay tax under the Act at the time of transfer;
- There must be a transfer of property, either directly or indirectly, by means of a trust or by any other means whatever;
- The transferee must either be:
- The transferor’s spouse or common-law partner at the time of transfer or a person who has since become the person’s spouse or common-law partner;
- A person who was under 18 years of age at the time of transfer; or
- A person with whom the transferor was not dealing at arm’s length;
- The fair market value of the property must exceed the fair market value of the consideration given by the transferee.
The Minister alleged that there were two transfers. First, Mr. Watts used funds contained in his fiscal arbitrators sole proprietorship business account (Account No. 785) and transferred those to a separate corporate account (Acct. No. 895) that he also owned. The second transfer was from the 895 Account to a law firm in trust.
The second transfer was used toward the payment of a home in Markham. The home was purchased in 2009 in the Appellant’s name alone.
Alleged Services to Corporation
As indicated above, if consideration of equal value is given in respect of any transfer, then section 160 would not apply. Here, the Appellant argued that she provided services to the businesses that were involved in the transfers, and that the home was consideration for the services she provided.
She stated that her role at the business included communicating with agents located across the country, collecting the required documents necessary to file tax returns, posting cheques and other administrative duties. She testified that during the tax season she worked close to sixty hours per week.
Decision & Analysis
The Court only had to determine two of the four factors, since the Appellant and Mr. Watts were clearly not arm’s length and the underlying assessments had not been put in dispute, which meant the Court could assume that the transferor was liable to pay tax at the time of transfer.
The Court found that the transfers were caught by section 160, despite being indirect, since indirect transfers are specifically contemplated by the legislation.
The Court did not accept that the Appellant provided services to the businesses. There was no evidence beyond testimony that she had worked at either place. No documentation was provided to record the number of hours the Appellant worked or what hourly rate she was to be paid. No evidence was provided to document the tasks the Appellant completed while working for the businesses in question.
The Court also found that Mr. Watts had indicated in the past during criminal proceedings that the house was a gift to his wife, the Appellant. The Court was understandably troubled by this glaring inconsistency in Mr. Watts’ story.
The appeal was dismissed with costs to the Crown.
It is important to note that, in the context of determining whether the Appellant provided services to a business for consideration, the Court placed importance on the lack of evidence. The Court emphasized the lack of a potential agreement of service; the lack of evidence to show that the Appellant received T4 income for her work; evidence as to whether the businesses recorded an expense or deduction for the remuneration of the Appellant’s work; or the lack of evidence to show that the Appellant declared any employment or business income in 2009, the tax year in which she received the property.
An incredibly important fact in this case was that Mr. Watts jointly owned and operated the sole proprietorship account. And no one challenged the ownership of funds in the account.
by Amit Ummat