Canada: Fiscal Arbitrators - With Or Without An Assessment, The Liability For The Tax Debt Exists

Fiscal Arbitrators - With or Without an Assessment, the Liability for the Tax Debt Exists

In the decision of Watts v. The King, 2023 TCC 11 (CanLII), the Tax Court of Canada reiterated, at paragraph 58, that "with or without an assessment, the liability for the tax debt exists. The assessment does not create the debt. The case law shows that an assessment is merely an established procedural or administrative means for determining tax payable."

The Watts decision concerned a section 160 assessment targeting the indirect transfer of property between Miriam Watts and her husband, Lawrence Watts, who was sentenced to 6 years in prison for the Fiscal Arbitrators scheme. Mr. Watts was convicted of preparing fraudulent tax returns claiming false business losses resulting in tax refunds for hundreds of clients.

A taxpayer with an income tax debt they cannot pay may, for example, transfer property to a third-party with the expectation that Canada Revenue Agency ("CRA") cannot seize that property. However, pursuant to section 160 of the Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"), the transferee, if a non-arm's length person, can be held liable for the tax debt of the transferor. Similar provisions exist in other tax statutes. For instance, section 325 of the Excise Tax Act, RSC 1985, c E-15 (GST/HST).

The section 160 liability in Watts arose from two transfers. The first from an account belonging to Mr. Watts to his company CBLW Trading Company Limited ("CBLW"), incorporated under the Canada Business Corporations Act, RSC 1985, c C-44 ("CBCA"). The second, a transfer from CBLW to a trust. The funds from the trust were then used to purchase a home in the name of the appellant, Mr. Watt's wife.

The appellant was assessed for the tax debt of CBLW. However, CBLW was dissolved at the time it was assessed. Pursuant to subsection 226(2) of the CBCA, CRA had two years from the date of dissolution to assess CBLW. That did not occur and as a result the appellant argued that the underlying assessment was improper, therefore section 160 did not apply.

The Tax Court reiterated that CRA should have revived the corporation to properly assess it, which it did not do. Nevertheless, it found that CBLW was still liable because it had received a transfer from Mr. Watts for nil or less than fair-market value consideration. The appellant was therefore liable pursuant to section 160 because of the transfer from CBLW to her through a trust. According to subparagraph 160(1)(e)(ii) of the ITA:

The appellant also argued that the property was compensation for the work she did for Fiscal Arbitrators. The court concluded that circumstantial evidence did not support same. For instance, records of corporate expense deduction for wages, income reported in the respective tax year or related agreements did not exist. Furthermore, at his criminal trial, Mr. Watts declared that the property was a gift to his wife.

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