Before a sale, owners move things — a building to themselves, a property to a spouse, cash out to a holding company. Section 160 of the Income Tax Act attaches the transferor’s tax liability to the person who received the property, up to the value they got for free. It applies without regard to intent, and it has no limitation period of its own.
Key takeaways
SECTION 01 OF 09
Income Tax Act s. 160(1), marginal note Tax liability re property transferred not at arm’s length, applies where a person “has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever” to one of three categories of recipient.
Those are: “the person’s spouse or common-law partner or a person who has since become the person’s spouse or common-law partner”, “a person who was under 18 years of age”, or “a person with whom the person was not dealing at arm’s length”.
Note the second category in that first limb: someone who has since become a spouse. The relationship is tested with hindsight, not only as at the transfer.
SECTION 02 OF 09
Paragraph (e) sets the amount. The transferee and transferor are jointly and severally liable for “the lesser of (i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and (ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act… in or in respect of the taxation year in which the property was transferred or any preceding taxation year”.
In plain terms: you are on the hook for the value you received for nothing, but never more than what the transferor actually owed.
Treadstone Law puts the cap the same way in section 160 personal liability for a corporation’s tax debt: “Liability is capped at the value of the shortfall in an under-value transfer.”
SECTION 03 OF 09
Because pre-sale housekeeping is exactly the activity the section describes. Moving a building out of the operating company. Paying a dividend or a bonus to a related person. Transferring a property into a spouse’s name. Reorganising a group so assets sit somewhere tidier before a buyer looks at it.
Every one of those is a transfer to a non-arm’s-length person, and if the company had a tax liability at the time, the recipient can be assessed for the shortfall.
This is the tax-specific counterpart to the solvency problem a carve-out can create. The company does not have to be insolvent for s. 160 to apply — it only has to owe tax.
SECTION 04 OF 09
There is no requirement that the transfer was designed to defeat the Crown. A transfer at a genuine but under-market price between related parties can engage the section as readily as a deliberate strip.
That is what makes it a planning risk rather than only an enforcement tool. Ordinary family arrangements and ordinary corporate housekeeping can produce the exposure without anybody doing anything they would recognise as aggressive. Treadstone Law addresses the family version directly in section 160 and gifts between family members and the spousal version in spousal liability on a property transfer.
SECTION 05 OF 09
The liability is measured by the excess of fair market value over the consideration given. So a transfer at full value creates no exposure, and a transfer at a discount creates exposure equal to the discount.
Which makes valuation the whole battleground. Transfers between related parties are frequently documented at a number chosen for convenience, and the number chosen is precisely the figure the section keys on. Treadstone Law on below-value transfers covers the point.
Consideration also has to be real. A promissory note that is never paid, or an offsetting entry in a shareholder account that nobody settles, may not do the work the parties assumed it did.
SECTION 06 OF 09
Unlike the two-year window that applies to director liability under s. 227.1(4), section 160 does not come with its own limitation on assessment. That is one of its most commercially significant features and the one buyers and recipients are least likely to know.
Treadstone Law addresses the practical scope of that in how far back the CRA can go on a section 160 assessment. For a business owner the operative point is simple: a transfer from years ago is not automatically safe because it is old.
SECTION 07 OF 09
For a buyer, the question is not only what the company owes, but what has left it and where it went. A clean balance sheet at closing is consistent with assets having been moved out to related parties while a liability was outstanding.
Treadstone Law’s checklist for checking CRA debts before buying a business is the practical starting point, and its share-versus-asset comparison matters here too — a share buyer takes the company with its history of transfers as well as its history of filings.
For a seller, the question is whether anything received from the company in recent years could be characterised as an under-value transfer while tax was owing. That is worth knowing before a purchaser’s advisers ask.
SECTION 08 OF 09
Pay fair value, and be able to show how the value was determined. A defensible valuation contemporaneous with the transfer is worth more than a reconstruction three years later.
Deal with outstanding liabilities before moving assets, rather than after. The section keys on the transferor’s liability for the year of transfer or earlier, so the sequence of events genuinely matters.
Treadstone Law sets out the practical measures in protecting against section 160 liability. The general shape is that documentation and timing do most of the work, and both have to happen before rather than in response to an assessment.
SECTION 09 OF 09
Section 160 sits alongside the other personal exposures in a business sale. Director liability under s. 227.1 attaches to people who governed the company. Section 160 attaches to people who received property from it. The two catch different populations and can catch the same person twice.
And both are worth understanding at the point when pre-sale structuring is being designed — the same point at which the 24-month tests governing the capital gains exemption are decided. These are not separate projects. They are the same decision about what to move, when, and at what price.
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