Could a deposit from your spouse create personal liability for their tax debt?

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Money moves between spouses constantly. One covers the mortgage this month, the other covers the property taxes. One lends the other cash from the corporation. Nobody writes it down, because writing it down would be strange.

Section 160 of the Income Tax Act is the provision that makes not writing it down expensive.

In Pacheco v. The King, 2024 TCC 14, the Canada Revenue Agency assessed a woman personally for $82,055.08 deposited into her bank account by her husband at a time when he owed tax. Her position was not that the deposits could not be transfers. It was that $47,750 of them repaid genuine loans she had made to him out of her own corporation, so that portion was supported by consideration and section 160 should not reach it.

Justice Susan Wong accepted that the cheques had been issued. She accepted that the deposits were connected to those cheques. She dismissed the appeal anyway.

The distance between those two facts and that outcome is the most useful thing in this decision.

The facts

The appellant was the sole shareholder of Chrisalex Corporation. She provided bookkeeping services for the corporation’s clients, and the corporation paid her management fees, believed to be roughly $43,500 in each of 2013 and 2014.

Those fees were not paid to her in cash. Her husband, an accountant by profession, testified that the corporation remunerated her by applying the management fees to her shareholder loan account, and she drew from that account as needed. There was no written agreement recording that arrangement between the corporation and its sole shareholder.

He handled the corporation’s banking, prepared its financial statements, and prepared both the corporation’s returns and hers.

Between about January 2013 and May 2014, the corporation issued ten cheques totalling $47,750 payable to the husband. His evidence was that these were loans from his wife to him, funded by drawing down the management fees sitting in her shareholder loan account, and that he used the money to pay expenses she was responsible for: condominium fees, mortgage payments, property taxes. No evidence was tendered about the nature of those expenses beyond that description.

Between January 6, 2014 and April 29, 2015, he deposited $82,055.08 into her Royal Bank account. His evidence was that these deposits repaid the loans in full.

The parties agreed that during that period his outstanding tax liability exceeded $82,050.

CRA assessed her under section 160 on March 5, 2018 for the full $82,055.08. At the start of the hearing her counsel conceded $34,305.08 and disputed the remaining $47,750, the amount said to correspond to the ten cheques.

How section 160 works

Section 160 is a collection provision. It exists to stop a tax debtor from putting property beyond the reach of the Crown by moving it to someone close to them for less than it is worth.

Two features of it surprise people.

First, it applies regardless of whether either person knew about the tax liability at the time of the transfer. The Court cited Eyeball Networks and 9101-2310 Quebec Inc. on this point. Not knowing will not by itself stop an assessment, and you can be assessed for a transfer you had no reason to think was problematic. That is narrower than saying an innocent recipient has no answer.

A recipient can still contest whether the statutory conditions are met, including the relationship, the value of the property, and the consideration given, and the Act carries specific exceptions, among them subsection 160(4) for certain transfers between spouses who are separated and living apart under a decree, order, judgment, or written separation agreement.

Second, it does not transfer your spouse’s debt to you. This is widely misunderstood and worth being precise about. Section 160 creates a separate liability in the recipient, joint and several with the transferor, capped at the lesser of two amounts: the fair market value of the property received less the fair market value of the consideration given for it, and the transferor’s tax liability up to and including the year of transfer. You are exposed to what you received, not to everything they owe.

The assessment here was for $82,055.08, and the parties agreed his outstanding liability during the transfer period exceeded $82,050. The two figures sit close together, though the precise operation of the cap depends on the underlying assessment and liability calculations rather than on the round numbers in the reasons. Note also that the second limb reaches the total of all amounts the transferor is liable to pay under the Act for the transfer year or any preceding year, which is broader than an amount labelled tax.

Drawing on Livingston and Eyeball Networks, the Court set out the four conditions that must be met:

  1. The transferor must be liable to pay tax under the Act at the time of the transfer.
  2. There must be a transfer of property.
  3. The transferee must be a person with whom the transferor was not dealing at arm’s length, or an otherwise designated transferee.
  4. The fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee for it.

Three of those were never in issue. He owed tax. Money moved. They were married.

Everything turned on the fourth.

The argument, and why it should have worked

The fourth condition is where consideration lives, and consideration is where a genuine loan repayment does its work.

If she lent him $47,750 and he repaid $47,750, she gave up something of equal value: the debt he owed her was extinguished. Property came in, but consideration went out, and the shortfall under section 160 is nil. Repaying a genuine, legally enforceable debt is not a transfer for inadequate consideration. It is settling an account.

That argument is legally sound. The difficulty was proving that the debts existed and that the deposits repaid them.

What the Court accepted, and what it could not

This is the part worth reading closely, because it is more demanding than the usual “keep good records” lesson.

The Court accepted that the ten cheques totalling $47,750 were issued and made payable to the husband. It further accepted that during the transfer period he made deposits into her bank account that were connected or related to those cheques.

So the Court accepted that money went out and money came back, and that the two were related. And it still could not conclude, on the oral testimony and limited documents available, that the cheques were loans from her to him or that his deposits were repayments to her.

Sit with that gap. Money out, money back, connection accepted, characterization unproven. What the Court was saying is that a flow of funds in two directions is not self-explaining. Cheques from a company to a person could in principle be loans, or salary, or reimbursement, or a shareholder benefit, or a gift; the Court made no finding about which, and did not need to. Deposits from a person to their spouse could be repayment, or support, or a gift, or a transfer. The transactions do not announce which they are. Something outside the bank records has to say so.

Here almost nothing did. The corporation issued ten cheques; the documentary evidence consisted of two cancelled cheques from March and April 2014 and ten cheque stubs completed by the husband himself. The stubs carried neither the corporation’s name nor its account number, though the numbers on two of them matched the two cancelled cheques. The rest of the records had been destroyed by flooding in the basement storage of their building.

There was no written agreement between the corporation and the appellant recording how the management fees became a shareholder loan balance. No promissory notes. Nothing tying any particular deposit to any particular cheque.

The husband’s explanation for the absence of documentation was practical and, in ordinary life, entirely reasonable. With six to eight expense transactions a month, drawing up a promissory note for each one was impractical. They had been married 30 years and trusted each other to honour their obligations without paperwork.

The Court did not call that account dishonest. It called it unproven.

The two findings that decide cases like this

Two passages in the reasons carry more weight for planning purposes than the outcome does.

An unusual structure demands better records

The Court observed that the contention that the appellant directed her corporation to lend money to her husband so that he could pay her expenses, rather than paying those expenses herself or having the corporation pay them, was sufficiently atypical that reliable documentary evidence became all the more important.

Read that as a sliding scale, because that is what it is. The documentation a structure needs is proportional to how unusual it looks from the outside. A conventional arrangement carries some of its own plausibility; a court can see immediately why a person would do it. An unusual one carries none, and the paper has to supply what the structure’s own logic does not.

Notice the money took a longer path than it needed to. She was the sole shareholder. She could have paid her own expenses. The corporation could have paid them. Instead her funds went out through the corporation to her husband so he could pay them, and then he paid her back. Each of those steps may have had a sensible reason, but none of the reasons were in evidence, and the shape of the transaction raised the evidentiary bar rather than lowering it.

If you are advising on a structure that takes an indirect route, the documentation burden is higher, and it is highest precisely where the client feels most confident that everyone involved understands what is going on.

The empty chair

The appellant did not attend her own hearing. Her husband testified on both their behalves.

The Court said it would have been helpful to hear her testify about the arrangement in her own words rather than hearing only his account, noted that he appeared to handle most of the financial affairs of both the corporation and the appellant, and drew an adverse inference from her absence that her testimony would not likely have been helpful to her case.

That is the harshest passage in the decision. An adverse inference is not a neutral observation that a gap existed; it is the Court resolving the gap against the party who could have filled it. It was also fact-specific. The inference arose because the person whose name was on the assessment could have clarified the disputed arrangement in her own words and did not, while the only witness was the person who ran the finances. A taxpayer’s absence does not automatically defeat an appeal.

The pattern behind it is common enough to be worth naming. One spouse runs the finances; the other signs where indicated and does not follow the detail. That works fine until the arrangement has to be explained to someone who was not there. At that point the person whose account matters is the one whose name is on the account and on the notice of assessment, and if that person cannot speak to the arrangement, or does not come to speak to it, the silence is not neutral.

Compare it to the evidentiary problem that sank the taxpayers in Schonberger v. The King, 2024 TCC 82. That case was about something else entirely, a challenge to underlying corporate reassessments after dividends, but the failure was the same shape: the bookkeeper and accountants who made the entries never testified. The person who could explain the transaction was not in the room.

The outcome

The appeal was dismissed with costs on February 1, 2024, following a hearing in Calgary in December 2022. The Court gave the parties until April 2, 2024 to agree on costs, failing which written submissions were to follow and costs would be awarded in accordance with Tariff B.

What to do about it

Document shareholder loans when they are made, not when they are questioned. A shareholder loan account records a real legal relationship between two persons, but the account entry is an accounting position; the underlying transaction still has to be established. In a one-shareholder corporation this is the relationship most likely to go undocumented, precisely because it feels like moving your own money around. Record how amounts get credited to the account. Record draws. If management fees are being applied to the account instead of paid in cash, put that arrangement in writing, even if the only two parties are you and your own company.

Tie repayments to the specific advance. The Court accepted the deposits were connected to the cheques, and it still would not find that they were repayments. A cheque memo, a transfer reference, or a maintained loan schedule showing the running balance after each advance and each repayment converts an association into a record. This costs almost nothing at the time and cannot be reconstructed later.

Match your paper to how unusual the structure is. The more indirect the route the money takes, the more explanation it needs on file. Write a short contemporaneous note explaining why the structure is what it is. A memo written when the decision was made carries weight; the same explanation offered from the witness box nine years later is just testimony.

Do not keep the only copies in one place. The flood explanation was accepted as an explanation and did not help, because the loss was still the taxpayer’s problem. Bank and card statements can be pulled years later. Loan schedules, agreements, and internal memos cannot be. Those live off-site or in the cloud.

Both spouses should understand the arrangement. Not as a matter of fairness, as a matter of evidence. Where your own account of a disputed arrangement could materially clarify it, being unable or unwilling to give that account is a real evidentiary risk. When your name is on the assessment, you are the one the Court wants to hear from.

Remember that intent is irrelevant. There is no requirement that either party knew about the tax debt or intended to defeat collection. A section 160 assessment is not an accusation; it is an arithmetic exercise, and subsection 160(2) lets the Minister make it at any time. Oral evidence can establish consideration, and documents are not a statutory condition. But when the nature of a related-party transaction is disputed years later, records are usually what decides it.

Watch the case breakdown

Sources

Talk to us

If you are an incorporated business owner in Burnaby, Vancouver, Surrey, New Westminster, or anywhere in Metro Vancouver, and money moves between you, your spouse, and your corporation without a clear record of what each movement is, that is worth a conversation before it becomes a file.

At Cloudiverse CPAs we help owner-managers document shareholder loans properly, build evidence folders that hold up years later, and structure family and corporate transactions so they can be explained to someone who was not there.

Book a free 30-minute discovery call:  https://www.cloudiverse.ca/book-a-free-30-minute-discovery-call/

Disclaimer

This article is general information only. It is not tax, legal, accounting, or other professional advice, and it does not create a client relationship. It reflects the law as of the date of publication and may not be current. Every situation turns on its own facts. Before acting on anything discussed here, consult a qualified professional about your circumstances.