Non Arm’s Length Tax Assessments

Non-Arm’s Length Assessments

 

When the collections agent has determined that there is nothing left to be collected from a tax debtor, besides going after directors (which is only available for corporate tax debtors), the CRA can also go after any non-arm’s length recipients of assets.

 

The ITA says that if person or a corporation owes a tax debt, and while they owe a tax debt they transfer assets to a non-arm’s length (related) person for less than fair market consideration, the recipient of the assets can be assessed for the lesser of the tax debt and the benefit received by the transfer.

 

So in English, if a tax debtor owes $100,000 and transfers a $20,000 vehicle to a non-arm’s length party for $1, that transferee would have received a benefit of $19,999.  And having taken a $19,999 benefit from the taxpayer to the detriment of their ability to pay the CRA, that transferee can be assessed to pay up to $19,999 of the transferor’s taxes.  And if the tax was only $6,000 for example (less than the benefit received), then the CRA could assess the transferee for up to the $6,000.

 

This rule prevents a taxpayer from artificially impoverishing themselves to the detriment of their ability to pay the CRA.

 

So if a corporation pays dividends to a shareholder, or if a sole proprietor deposits their pay cheques into their spouse’s bank account, they can trigger a non-arm’s length assessment of the related party.  Sometimes these transfers are intentional ways to try to avoid paying taxes, or ways to try to protect assets.  Other times these transfers are no more than depositing money into a spouse’s account to help pay for the monthly bills.  And of course, when the amount is no more than a contribution for bill payments the cases are generally found in favour of the taxpayer when the amounts are reasonable.  But in other cases, the results can be disastrous.  Below is an article which explains why.

 

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