From a Corporate Sale to a Personal Bill: The Section 160 Trap
Many business owners believe that once a sale is done, the tax stays with the company. However, a 2026 Tax Court of Canada decision shows that this is not always the case. In fact, section 160 of the Income Tax Act can reach you personally — even when the company is the one that owes the tax.
This post walks through Patel v. The King, 2026 TCC 33 in plain English. It explains what happened, why the Court ruled the way it did, and what it means for you as a business owner or shareholder.
Case link: Patel v. The King, 2026 TCC 33
What Is Section 160 of the Income Tax Act?
First, it helps to understand the rule itself. Section 160 is a collection tool that CRA uses when a taxpayer transfers property to a related person. In other words, it applies when value moves from one person or company to another person who is not at arm’s length.
When that happens, CRA can hold the recipient personally liable for the transferor’s unpaid tax. Therefore, even if you did not cause the tax problem, you can still be on the hook for it.
The liability is capped at the lesser of:
- the unpaid tax of the transferor, and
- the excess of the fair market value of what you received over the fair market value of what you gave
As a result, if you received value without paying full fair market value, and the company had unpaid tax at the time, CRA can assess you personally.
What Happened in Patel v. The King?
The structure
Dr. Patel personally owned shares in Allied Canada, an operating company. He then transferred those shares to a numbered holding company. In exchange, he received shares of that holding company.
The Court made no finding on whether a section 85 rollover was used for that transfer. It also did not address whether the lifetime capital gains exemption was available or claimed.
The sale
Subsequently, the holding company sold the Allied Canada shares to a third-party buyer at arm’s length. That sale created a large capital gain. As a result, a significant corporate tax liability arose inside the holding company.
Importantly, that tax stayed inside the company. It was not paid before value began moving out.
The transfers
After the sale, Dr. Patel received value from the structure. Specifically, cash, promissory notes, and preferred shares moved to him personally. Meanwhile, the holding company’s tax liability remained unpaid.
CRA’s position
CRA assessed Dr. Patel personally under section 160. The reason was straightforward: the company owed tax, and value moved to a related person. Therefore, CRA applied the section 160 rules to hold him liable.
Why Valuation Was Central to This Case
One of the most important issues in this case was fair market value. Because section 160 liability depends on the difference between what you received and what you gave, valuation drives the entire calculation.
The Court confirmed that fair market value must reflect economic reality. Specifically, a large unpaid tax liability sitting inside a corporation reduces the fair market value of that company’s shares. Consequently, the value received by Dr. Patel had to be assessed net of that embedded liability.
Both sides led valuation evidence. Furthermore, the Crown sought to revise its admissions on the fair market value of the preferred shares to align with its expert’s conclusions and its successive transfer theory.
What Are Successive Transfers?
This is where the case becomes especially relevant for owners of multi-entity structures.
The Crown argued that section 160 applied through successive transfers. In other words, the value did not need to flow directly from the tax debtor to Dr. Patel. Instead, it could move through a chain of entities and still trigger section 160 exposure at the end of the chain.
The Court relied on Microbjo Properties to support this position. As a result, the Court accepted that successive transfers are a live issue under section 160. Moreover, it allowed the Crown to withdraw certain admissions so that the real question could be decided on the merits.
This matters because many business owners assume that adding more steps to a transaction reduces their personal exposure. However, this case confirms that CRA can follow the value through multiple entities and multiple transfers.
What the Court Decided
The Court ruled on a motion regarding the Crown’s withdrawal of admissions. On balance, it found that the interests of justice favoured allowing the Crown to revise its position. Even though the motion was not brought in a timely way, the prejudice to Dr. Patel was treated as compensable through costs.
Specifically, costs were awarded to cover the expense of revising expert reports and completing additional pre-trial steps.
GAAR was also pleaded in the alternative in the broader appeals. However, this particular decision focused entirely on the section 160 issues and the pleading amendments. The GAAR question was not decided here.
Key Takeaways for Business Owners
Here is what this case means in practical terms.
First, if your company owes tax, any value that flows to you personally before that tax is paid can create section 160 exposure. This applies even if the transfer seemed routine or was part of a legitimate post-sale distribution.
Second, fair market value is not the gross sale price. Instead, it must reflect any embedded tax liabilities inside the company. Therefore, a proper valuation is essential before any value moves out.
Third, section 160 can apply through successive transfers. Consequently, adding layers to your structure does not automatically reduce your personal exposure.
Fourth, timing matters. The sequence of events — when the tax arose, when the transfers happened, and in what order — is critical to the section 160 analysis.
Is Your Structure at Risk?
Section 160 is a strict liability rule. It does not require intent to avoid tax. It applies based on the facts of the transfer alone. As a result, even well-intentioned planning can create unexpected personal exposure if the sequencing or valuation is not handled carefully.
If you have a holding company, have completed a share sale, or have moved money out of a corporation; it is worth reviewing your structure with a qualified CPA.
We provide corporate tax filing, planning, and restructuring advice for business owners across Burnaby, Vancouver, and the Lower Mainland.
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Disclaimer
This post is a general educational summary of a public court decision and statutory provisions. It is not legal, tax, or valuation advice. Tax results depend on your specific facts, documentation, timing, and applicable law. Please consult a qualified professional for advice specific to your situation.