Most people do not think twice before transferring assets between family members. Why would they? People deposit money into each other's accounts. They add each other's names to property in order to qualify for a mortgage. They sell assets to one another for a dollar. They move closely held company shares back and forth. And in doing so, they inadvertently create massive tax problems for themselves — some of which are impossible to fix.
Sometimes these transfers create capital gains tax debts that would never otherwise have existed. Other times they force one person to pay a relative's tax debt that could not normally have been collected from them. What most people do not realize is that Canadian tax law contains provisions designed to stop non-arm's-length parties — spouses, siblings, parents and children — from contracting freely with one another, by deeming their transactions to occur at fair market value, and other provisions that penalize the transfer of property between them under certain conditions.
Two engines: deemed fair market value and derivative liability
Paragraph 251(1)(a) of the Income Tax Act deems that related persons do not deal with each other at arm's length, regardless of how they actually behave. So if a parent sells a $1,000,000 business to a child for $1, the CRA treats the sale, for tax purposes, as occurring at fair market value. If the parent's shares had a cost base of $100, the result is a capital gain of roughly $999,900 — even though only $1 changed hands. Subsections 69(1) and (2) work the same way for property generally: pay more than fair market value to a non-arm's-length transferor and you are deemed to acquire at fair market value; receive less than fair market value and you are deemed to have proceeds equal to fair market value.
The second engine is the collections tool. Subsection 160(1) of the Income Tax Act and subsection 325(1) of the Excise Tax Act exist to stop tax debtors from artificially impoverishing themselves to the detriment of their ability to pay. They do this by making the recipient liable when a tax debtor transfers property to a related person, or sells it to them for less than fair market value. The transferor and the transferee become jointly and severally liable for the transferor's tax, up to the benefit the transferee received. If a $20,000 car is transferred from one spouse to another for $1, the transferee received a $19,999 benefit — and can be assessed up to $19,999 toward the transferor's tax debt.
A cautionary tale: the mother's bank account
The reach of section 160 is wider than most people expect, as one case makes painfully clear. An elderly retired woman gave her son a bank card from a disused account so he could deposit his pay cheques — his own accounts had been frozen. Over three years, the son deposited $150,000 of his pay into his mother's account, then withdrew all of it for his own living expenses.
In court it was argued that the mother received no benefit: $150,000 went in, and $150,000 went straight back out to the son. The judge disagreed. At the moment each deposit was made, a non-arm's-length transfer had occurred. And because there was no agreement to return the money and no trust arrangement, the money the son received back was treated as a gratuitous gift rather than as consideration. Had it been consideration, the mother would have paid $150,000 for a $150,000 transfer, leaving her with no benefit and no liability. Instead, the court saw a non-arm's-length transfer for no consideration followed by a gift, and the section 160 assessment against the mother stood. She ended up paying $150,000 toward her son's tax debt, depleting her retirement savings.
The hidden danger: retroactive tax debts
The scarier, less obvious risk arises when someone receives a transfer from a relative who is not a tax debtor at the time. Even if the recipient verified that the transferor owed no tax on the transfer date, the CRA can later reassess the transferor for a year predating the transfer. That reassessment is deemed to have occurred retroactively, which means that, as of the transfer date, the transferor is retroactively considered a tax debtor. If the transferor then fails to pay, the CRA can pursue the recipient under section 160 — even though the recipient did everything right at the time. There is no due-diligence escape from a debt that did not yet exist.
The mortgage-on-title trap
A common, well-meaning arrangement creates collateral damage of both kinds. When children cannot qualify for a condo mortgage alone, they routinely add their parents to title. The parents never contribute to the down payment or the mortgage, but when it comes time to remove them from title, two problems appear. If the parent owes tax, the child can be assessed under section 160 or section 325 for having received a half-interest in the property for no consideration. And separately, the CRA can assess the parent for capital gains tax on the sale of a 50% interest — even though the share was gifted back for $0. If the property was worth $200,000 at purchase and $500,000 at transfer, the deemed proceeds on the parent's half are $250,000, triggering a capital gain of $150,000 against a parent who never put in a dollar.
Why these rules exist at all
It is worth understanding the policy behind the deeming rules, because it explains why the CRA enforces them so rigidly. Subsections 69(1) and (2) ensure that capital gains tax is eventually paid as property moves between generations. Without them, parents could sell the cottage to their children at the original purchase price — avoiding any capital gain — and the children could later do the same with their own children, so the CRA would be indefinitely deprived of tax on a steadily appreciating asset. The rules close that loophole by treating the disposition as occurring at fair market value regardless of the actual price.
The section 160 derivative-liability rules serve a parallel anti-avoidance purpose. They stop a tax debtor from shifting assets to a spouse or child for nominal consideration and then claiming to be unable to pay the CRA. By making the recipient jointly and severally liable up to the benefit received, the law removes the incentive to artificially impoverish oneself. The provisions are blunt instruments, however, and the same bluntness that catches deliberate avoidance also catches families who were simply trying to qualify for a mortgage or help a relative through a rough patch.
When the transfer was genuinely just for bills
Not every deposit into a relative's account is a section 160 disaster. The provision targets transfers for less than fair market value that leave a tax debtor less able to pay. Where the amounts are reasonable and represent no more than an ordinary contribution toward shared household bills, the cases generally come out in the taxpayer's favour. The danger lies at the extremes — large sums, no documentation, and an arrangement that looks, after the fact, like a way to move value out of a debtor's reach. The difference between a defensible contribution and a costly assessment often comes down to whether the arrangement was documented at the time: a written agreement, a genuine trust arrangement, or clear records showing consideration actually flowed.
How these sit within the CRA's collections strategy
Section 160 is one tool in a broader collections strategy. When a collections officer concludes there is nothing left to collect directly from a tax debtor, the next moves are to pursue the directors of a corporate debtor (where the debt includes trust amounts) and to pursue non-arm's-length recipients of the debtor's assets. So a section 160 assessment frequently appears late in a collections file, after the officer has exhausted the debtor and is looking for a related party who received value. Recognizing where the file sits in that sequence helps a representative anticipate the assessment before it lands — and advise the client not to make further transfers that would only add new targets. For the wider collections picture, see our guide to inside CRA collections.
The practical lesson
These provisions also serve a legitimate policy goal: they prevent one generation from selling a property to the next at the original purchase price to avoid ever paying capital gains tax. Without them, the CRA could be indefinitely deprived of tax on appreciating property that simply passes down the family line. But the collateral damage to ordinary, well-intentioned families is real and frequent.
The takeaway is straightforward: before transferring any asset to a family member or other related party — adding a name to title, depositing pay into a spouse's account, moving company shares, selling the cottage to the kids — get advice and consider every unintended tax consequence. It is far cheaper to plan a transfer correctly than to unwind a section 160 assessment. For related reading, see our guide to inside CRA collections and our service pages on tax disputes and objections and holistic tax and estate planning.
This chapter began as an article on the dangers hiding inside everyday family transactions. This guide draws on Dale Barrett's book "Victory Over the CRA", written for accountants who represent their clients in disputes with the Canada Revenue Agency.