CRA can collect tax debt from spouses

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If you owe money to the Canada Revenue Agency, it’s pretty hard to avoid paying up. In fact, even if it’s your spouse or partner that owes the CRA money, depending on the circumstances, you could be held personally liable for paying your spouse’s tax debts. A recent tax case, decided earlier this month, shows how the CRA can invoke the “joint liability rule” in section 160 of the Income Tax Act to collect a tax debt.

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Before delving into the details of this latest case, let’s review what the law says about the tax debts of others. Under the joint liability rule, the CRA has the power to hold an individual liable for the tax debts of someone with whom they have a non-arm’s length relationship if they’ve been involved in a transaction seen to avoid tax.

“Non-arm’s length” refers to individuals who are related — typically blood relatives, a spouse or common-law partner — as well as a corporation and its shareholders, and anyone else the CRA believes is factually not at arm’s length with each other.

Four criteria must be met for the CRA to successfully win a joint-liability assessment: there must have been a transfer of property; the transferor and the transferee must not have been dealing at arm’s length; there must not have been adequate consideration paid by the transferee to the transferor; and the transferor must have had an outstanding tax liability at the time of the transfer.

In the recent case, which has been in the courts for nearly six years, the taxpayer was assessed under section 160 of the Tax Act on the basis that she received property valued at $10,650 from her husband at a time when her husband owed more than that amount to the CRA. The consequence of section 160 applying is that the transferee must pay the amount owing to the CRA up to the consideration they received from the transferor.

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Between April 2012 and June 2013 the taxpayer’s husband made four different transfers of property to his wife totaling $10,650. These transfers were made by cheques from the husband’s personal bank account to the taxpayer’s personal bank account. Since they were married, they are clearly non-arm’s length persons for the purposes of section 160.

The CRA took the position that the taxpayer did not provide any consideration to her husband for the transfer of the property. But in court, the taxpayer argued that she provided full consideration for the transfer of the property because she had “previously lent her husband various amounts of money and that the cheques in question were repayments of those loans.”

The judge remarked that in order to be able to justify the taxpayer’s “self-serving assertion” that the transfers were loan repayments and not mere transfers of cash, there needed to be either some form of documentary evidence, or maybe even testimony from the husband in court.

The only documentary evidence provided to support the taxpayer’s assertion is the fact that the memo lines on the cheques contain the words “payback” or “loan payback.” There were no promissory notes nor loan agreements, and there was no system for recording the outstanding balance of these “purported” loans at any given time. The judge acknowledged that “financial arrangements between spouses are generally looser than financial arrangements between third parties.” Because of that, he didn’t expect there to be extensive documentation, since loans between spouses are “the exception, not the rule.” But, when such loans are made, the judge noted that he “would expect to see (them) recorded or documented in some manner beyond a memo line on a cheque.” At a minimum, the judge said, he would have wanted to see evidence of cheques with similar memo lines going from the taxpayer to her husband when the loans were first advanced.

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When the trial first started back in April 2019, the taxpayer didn’t call her husband as a witness because he was out of the country. Her daughter, acting as the taxpayer’s agent in court, contacted her father by phone and reported that he had documentary evidence at home that would show that his debts were less than $10,650. Based on this, the judge agreed to adjourn the hearing of the appeal and allow the wife to re-open her evidence in order to call her husband as a witness.

Following delays due to COVID, the Tax Court scheduled the continuation of the case for October 2022. After the Court Registry had closed on the last business day before the trial was to be heard, the taxpayer requested an adjournment for medical reasons.

Since that adjournment, the Tax Court has made numerous unsuccessful attempts to reschedule the continuation of the trial, but neither the taxpayer nor her daughter made any attempt to work with the court to find a way for the hearing to proceed.

In the intervening years, the taxpayer became very ill, but her presence wasn’t actually required in court for the case to proceed. The judge was simply looking for her husband to testify as to the nature or amount of the tax debt which he had disputed was owing.

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Fast forward to December 2024, after more than two years of trying to move the case along, when the judge gave the taxpayer three options: continue the trial in March 2025, when she could call her husband as a witness; continue the trial without him being called as a witness; or file written closing arguments by February 28, 2025, and the judge would decide the outcome based on those submissions.

The taxpayer did not respond to any of these options, nor to a voicemail message from the court, at which point the judge was left with no choice but to decide the case based on the evidence presented to date. The judge drew an “adverse inference” from the taxpayer’s failure to produce her husband as a witness, and concluded that she did not do so because he does not actually have the evidence to support her assertion that there was no underlying tax debt. The judge therefore found the taxpayer liable for the $10,650 of tax debts owing by her husband.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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