Liability under section 160 – Damis Properties Inc. v. The Queen

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In Damis Properties Inc. v. The Queen (“Friends“), The Tax Court of Canada (“CCT“) Found subsection 160 (1) of the Income Tax Act (“ITA“) [1] inapplicable because the appellants and their former subsidiaries were dealing at arm’s length at the time of the transfer of the ownership in question. The TCC also found that, although subsection 160 (1) applied, the appellants’ liability under paragraph 160 (1) (e) was void because they had given consideration for fair market value. .

The facts in Friends can be briefly summarized as follows. The appellants each owned a general partnership. Prior to selling certain farmland held by the partnerships, each appellant incorporated a subsidiary and transferred its respective interests in the partnership to the subsidiaries. After the sale of agricultural land, the proceeds from the sale were allocated to subsidiaries in the form of cash or cash and intercompany receivables. The appellants then sold their shares to a third party buyer (“WTC“), under an agreement to sell shares, for more than the after-tax value of the subsidiaries. WTC then paid for the shares using cash or receivables in the subsidiaries.

Subsection 160 (1) is an anti-avoidance rule that applies when a transferor transfers property directly or indirectly to a non-arm’s length transferee (and certain others) for less than fair market value (“JVM”) Consideration. Essentially, it makes the assignee and assignor jointly and severally liable for paying the assignor’s tax under the ITA, limited to the lesser of the following amounts:

a) The excess of the FMV of the asset, at the time of its transfer, over the FMV of the counterparty; and

b) The total of all amounts that the transferor was required to pay under the Tax Act in the taxation year in which the property was transferred or in any preceding year or in respect of that year. -this.

In interpreting subsection 160 (1), the TCC has mainly taken a textual approach. It first considered whether there had been a transfer of property by the subsidiaries, “either directly or indirectly by way of a trust or by any other means”, to the appellants. The TCC found an indirect transfer because there was a clear connection between the reduction in the assets of the subsidiaries and the increase in the assets of the appellants.

The TCC then considered when the subsidiaries transferred ownership to the appellants. He concluded from the present phrase “has transferred” in the provision that the transfer under subsection 160 (1) does not take place until all of the steps necessary to effect that transfer have taken place. In this case, the transfer took place at the conclusion of the final stage of the transfer of ownership to the appellants, which occurred when WTC transferred ownership to the appellants to pay for the shares of the subsidiaries.

To determine whether each of the appellants and its former subsidiary were dealing at arm’s length at the time of the transfer, the TCC applied two ITA approaches. Under the related persons / statutory control approach, it applied subsection 256 (9) to determine the timing of the change of control. Since the transactions were closed no later than 12:38 p.m. on December 31, 2006, when WTC paid the purchase price to the appellants, the appellants were deemed under subsection 256 (9) to have ceased to control the subsidiaries. at the beginning of December. December 31, 2006. It was before the transfer time later the same day. Accordingly, the TCC concluded that the appellants and the subsidiaries were not related and therefore were dealing at arm’s length at the time of the transfer.

The TCC continued to apply the arm’s length approach under paragraph 251 (1) (c), where the relevant question was whether the parties acted in their own interests. The TCC noted that there was no evidence to suggest that the appellants continued to control the activities of the subsidiaries or acted in concert with WTC to direct the actions of the subsidiaries at the time of the transfer. Accordingly, the TCC concluded that all of their actions were compatible with their distinct interests and that they were dealing at arm’s length at the time of the transfer. Therefore, he concluded that subsection 160 (1) did not apply.

Assuming that subsection 160 (1) applied, the TCC then assessed the tax payable under the provision by determining the value of the consideration given for the property. He interpreted the words “consideration for the property” to mean the consideration given by the assignee for the property, regardless of who receives that consideration. In this case, the appellants paid for the property in the form of shares in the subsidiaries, which is fair market value because the price reflected the independent interests of each party. Accordingly, the appellants’ liability under subparagraph 160 (1) (e) (i) was held to be null.

The ICC further concluded that the GAAR did not apply. It concluded that the tax benefit claimed by the Respondent did not exist because the dividend arrangement relied on by the Respondent was unreasonable. Even if the tax benefit existed, the TCC found no avoidance transactions and that the transactions did not contravene the purpose of subsection 160 (1).

2021 Budget Amendments to Subsection 160 (1)

Budget 2021 proposed to strengthen the CRA’s collection efforts by ending aggressive debt avoidance schemes designed to circumvent the application of subsection 160 (1). In certain circumstances, the application of subsection 160 (1) has been improved, for transfers of property that occurred on or after Budget Day, to prevent planning from technically avoiding subsection 160 (1) by:

a) Ensure that a tax debt crystallizes after the end of the tax year in which the transfer of ownership takes place, considering that the tax debt arose during the tax year during which the property was transferred;

b) Ensure that the assignor is at arm’s length from the assignee at the time of the transfer of ownership, considering that they were at arm’s length from each other; Where

(c) By removing the net asset value of the transferor by means of a series of operations which does not violate the one-off valuation test of the property transferred and of the consideration given for this purpose, by determining these values ​​on the basis of the base of the overall result of the series of transactions, rather than just using the values ​​at the time of transfer.

The planners and promoters of these tax avoidance schemes are also subject to penalties equal to the lesser of the following amounts:

a) 50% of the tax you are trying to avoid; and

(b) $ 100,000 plus the remuneration of the planner or promoter for the project.

These changes provide the CRA with enhanced tools to deploy when seeking recovery from taxpayers under subsection 160 (1). With massive and seemingly steadily growing deficits over the past few years, the CRA will certainly examine all possible avenues to accomplish the demanding task of increasing tax revenues.


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