Feigenbaum Law

Transferring Tax Debt in Addition to Money

Personal Tax Planning
Tax Disputes & Litigation
February 19, 2020

Some people might go to great lengths to avoid paying a tax debt. One tactic that shows up from time to time is the transferring of cash or assets to a family member. A recent decision from the Tax Court of Canada serves as a helpful reminder that trying to escape a tax debt through these means can leave both the original tax debtor as well as their family member in trouble with the Canada Revenue Agency (CRA).

A Dispute With Respect to the Computation of Income

The case concerned two brothers (“DS” and “JS”). Between the years 1995-2005, DS worked as a pilot for Air Canada and resided in Turks and Caicos. He was involved in a dispute with the CRA about the computation of his income for the years 1995-2001, based on the taxation of income earned flying international flights. By 2015, the CRA had calculated that DS had a tax debt of just over $230,000, including interest. In early 2016, the CRA granted taxpayer relief to DS, cancelling interest owed for the years 2009-2013, reducing his debt to approximately $180,000.

Transfers of Funds Deemed a Loan

Over the course of three days in late 2005 and early 2006, DS transferred close to $230,000 to his brother JS, who resided in Canada. This occurred after he had retired from Air Canada and took a lump sum retirement payment. JS said these payments to his brother were loans, and that since they were family, he felt no need to document them, trusting that his brother would pay him back.

The brother also testified that he borrowed the funds from his brother.

The CRA, however, took a different stance. It argued that the transfers were not loans, challenging the credibility of the brothers. The CRA said it was implausible that JS could not explain the reason for the alleged loan. The CRA sought to lean on sections of the Income Tax Act which allow the CRA to apply a person’s tax debt to someone else who receives money or property from that person, making the transferee and the transferor jointly and severally liable to pay the debt back. The CRA was looking to use this section of the Act to collect the money owed by DS from JS instead.

Loan Story Was Not Credible

The court rejected JS’s argument that the various amounts transferred to him by his brother could qualify as loans. DS had said that his net worth was $1 million at the time of the transfer and that even though he had started working with another airline, he did not have enough assets to give the brother that money without the promise of repayment. JS also testified that he used the money towards the purchase of a condo, but later said it also went to cover living expenses. He then claimed that his own savings were used to pay for the condo.

The court was unable to determine what happened to the money JS received from DS, adding “it stretches credibility to the breaking point to suggest that the Appellant cannot recall what he did with the substantial sum of money received from his brother.” The court noted that JS had rarely taken on debt in the past and that it was unlikely he just forgot what the money was loaned to him for.

The court concluded that the brothers chose not to divulge the true nature of the transfer and that as a result, JS is still on the hook for his brother’s taxes owed to the CRA.

Contact the experienced team at Feigenbaum Consulting to find a solution for your personal tax planning needs. We have unparalleled knowledge of Canadian and American tax, making us leaders in this field. Please reach us online or by phone at (905) 695-1269 or (877) 275-4792 to see how we can help you today.


Tagged: Income Tax Act, non-Canadian resident