By Gergely Hegedus
A recent case from the Tax Court of Canada has shed light on who has the onus of establishing the correctness of an underlying assessment issued pursuant to section 160 of the Income Tax Act.
Section 160 of the Income Tax Act permits the Minister of National Revenue (“Minister”) to assess a person who receives property (“Transferee”) from a tax debtor (“Transferor”) for the taxes that are owed by the tax debtor if the following four conditions are met:
1. Firstly, there must be a transfer of property.
2. Secondly, the Transferor must have a tax liability at the time of the transfer.
3. Thirdly, the property must be transferred for less than fair market value.
4. Fourthly, the Transferee must be either (i) the Transferor’s spouse, or common law partner, (ii) a person who was under 18 years of age, or (iii) non-arm’s length to the Transferor.
If these four conditions are met, then the Transferee can be held liable for the Transferor’s tax up to the amount by which the fair market value of the property exceeds the consideration provided by the Transferee.
A person assessed under section 160 of the Income Tax Act can challenge the underlying assessment of the Transferor (tax debtor). In past jurisprudence, it was unclear who had the onus of establishing the correctness of the underlying assessment. The Tax Court of Canada has helped to clarify this issue in the recent case of Monsell v. Her Majesty the Queen, 2019 TCC 5.
As noted in Monsell, the general rule in tax appeals is that the taxpayer bears the onus of establishing that an assessment or reassessment is incorrect. However, in certain circumstances, “where the facts concerning the underlying reassessments are exclusively or peculiarly within the knowledge of the Minister, the onus will shift to the Minister to show the correctness of the underlying reassessments.”
In Monsell, the appellants, Peter Molander and Tammy Monsell, were a husband and wife. In 2007, Peter and Tammy each received $15,000 and $41,500, respectively, from a corporation (“Corporation”). Peter’s mother was the sole director and shareholder of the Corporation. According to the Minister, the Corporation had a tax debt arising from its 2005, 2006 and 2007 taxation years. The Minister assessed the appellants under section 160 for tax owed by the Corporation.
Mr. Molander testified that he was only involved in the marketing and the sale side of a joint venture and the Corporation was one of many participants. Furthermore, he was not involved in the administration, accounting or preparation of corporate income tax returns for the Corporation’s 2005, 2006, and 2007 taxation years.
The Court found that the CRA was at one time in custody and control of the Corporation’s documents for the 2005 and 2006 taxation years, and the CRA was no longer capable of retrieving these documents because they had become lost or destroyed. The Court also found that the appellants never had control or access to the Corporation’s tax records for the 2005 and 2006 taxation years. Therefore, the Tax Court ruled that the Minister had the burden of establishing the correctness of the underlying corporate reassessments for the 2005 and 2006 taxation years.
The Court further found that the appellants had access to the Corporation’s tax return for the 2007 taxation year and the Minister assessed the Corporation based on its tax return for this taxation year. Since the appellants had access to the documents from which the underlying tax debt arose, the Court determined that the appellants had the onus of establishing that the Minister incorrectly assessed the Corporation for the 2007 taxation year.
If a person never had access and control over the documentation from which an underlying assessment arose, then the onus would likely be on the Minister to establish the correctness of an assessment. However, if a person has or had access to these documents, then he or she will likely bear the burden of proving that the assessments are incorrect.
This is a unique case where the taxpayers did not have access to the documents supporting the underlying assessment because the CRA had lost or destroyed them. This case may support a taxpayer’s defence to an assessment in other situations where he or she has no knowledge of the underlying facts or documents that support an assessment. For example, the defence may be applicable to a director’s liability assessment where the director was an outside director who did not have access to the corporate books and records due to a falling out with the other directors of a corporation.
In any event, it is important for clients to understand that if they receive property from a tax debtor who is a spouse, child, or someone they do not deal at arm’s length with, then they too may be held liable for the tax debt of that person if they do not provide proper consideration for the transfer of property.
Gergely recently joined the Tax Group of Dentons Canada LLP in Edmonton after working for nine years at the Department of Justice Canada’s Tax Law Services section. His work focuses on tax dispute resolution and litigation.