Section 160: Liability for Another Person’s Tax Debt

Most people assume that a tax debt belongs to the person who earned the income. Under section 160 of the Income Tax Act, that is not always true. If a taxpayer who owes money to the Canada Revenue Agency transfers property to a spouse, a child, a family member, or a related corporation for less than the property is worth, the CRA can reach through the transfer and assess the person who received the property. This is often called derivative liability or transferee liability, because the recipient's liability is derived from someone else's tax debt.

The rule exists to stop people from emptying their hands of assets to frustrate the CRA's collection efforts. It applies whether or not anyone intended to avoid tax, and there is no time limit on when the CRA can assess. Because the assessment lands on a person who may have had nothing to do with the original tax problem, section 160 frequently catches people off guard. This page explains how the provision works, the fact patterns that commonly trigger it, the conditions the CRA must satisfy, and the defences that may be available. It is general information about Canadian federal tax law, not legal advice for your situation.

What section 160 actually does

Section 160 of the Income Tax Act creates joint and several liability (in Quebec, solidary liability). When the conditions are met, the person who received the property and the person who transferred it both become responsible for the transferor's tax debt. The CRA does not have to choose between them and can pursue collection against either party. In practice, the CRA often turns to the transferee precisely because the transferor has put assets out of reach or has no ability to pay.

The liability is not unlimited. The transferee is liable for the lesser of two amounts: the amount by which the fair market value of the property transferred exceeds the fair market value of any consideration the transferee gave for it, and the total tax debt the transferor owed for the year of the transfer or any earlier year. In plain terms, the recipient's exposure is capped at the value shortfall — what the property was worth, minus what was paid for it — and it can never exceed the underlying tax debt. If you received an asset worth $80,000 and gave nothing in return, your potential liability under section 160 is generally up to $80,000, provided the transferor's tax debt is at least that high. If you paid $50,000 for that same asset, the shortfall is $30,000, and your exposure is reduced accordingly.

It is also important to understand what section 160 covers. The debt that can be pushed onto a transferee includes the transferor's federal income tax, interest, and penalties. A related rule under the Excise Tax Act, section 325, applies the same concept to GST/HST debts. Provincial tax debts are dealt with under their own legislation. The mechanics are similar across these regimes, but the section numbers and details differ.

The four conditions the CRA must establish

The courts have distilled section 160 into a four-part test. All four conditions must be present before a transferee can be held liable. If even one is missing, the assessment should not stand. The conditions are:

1. There was a transfer of property. Property is read broadly and includes money, real estate, shares, vehicles, and the payment of dividends. The transfer can be direct or indirect, and it can be made through a trust or by any other means.
2. The transferor and the transferee were not dealing at arm's length at the time of the transfer. Spouses and common-law partners, parents and children, and other related individuals are deemed not to deal at arm's length. A shareholder and their corporation are typically not at arm's length either. Unrelated parties can also be found not to deal at arm's length on the facts.
3. The consideration given by the transferee was less than the fair market value of the property. If the recipient paid full value, there is no shortfall and no derivative liability. The gap between value and consideration is what the CRA seeks to recover.
4. The transferor was liable to pay tax under the Act in the year of the transfer or any preceding year. The tax debt must already exist when the property moves. A transfer made before the transferor had any tax liability does not engage section 160.

Each of these conditions raises questions of fact and law. What counts as a transfer? Were the parties truly at arm's length? What was the property worth on the transfer date, and what was actually given in return? Was there an existing tax debt? The strength of a section 160 file usually turns on the answers to these questions, and they are often more contestable than a first reading of the assessment suggests.

Common fact patterns that trigger section 160

Section 160 arises in a handful of recurring situations. Recognizing them helps explain why so many ordinary family and business dealings can lead to a derivative assessment.

Transfers between spouses and common-law partners

This is the classic scenario. A taxpayer who owes the CRA transfers the family home into the other spouse's name, moves money into the spouse's bank account, or puts an investment in the spouse's name. Because spouses are deemed not to deal at arm's length, and because these transfers are frequently made for little or no consideration, they fit squarely within section 160. Transfers made during or around a marriage breakdown deserve particular care, since the timing and the consideration can be complicated, and the rules interact with family law obligations. Our overview of tax issues on separation and divorce looks at this intersection in more detail.

Dividends paid to family shareholders

A dividend is a transfer of property for which the shareholder gives no consideration — shares are not surrendered or reduced when a dividend is paid. If a corporation owes tax and pays a dividend to a non-arm's-length shareholder, such as a spouse or adult child holding shares, the recipient can be assessed under section 160 for the dividend amount. Dividend-based assessments are common where a family corporation has a tax debt and has continued to distribute funds to related shareholders, and owner-managers planning their remuneration should keep this exposure in mind.

Property moved into or out of a corporation

Assets transferred between an individual and their corporation, or between related corporations, can trigger section 160 when the price is below fair market value. A shareholder who rolls property into a company, or who has the company distribute assets to a related party, may create derivative liability if the transferor already owes tax. These transfers can also overlap with the director's liability rules, which can make directors personally responsible for certain unremitted corporate amounts — source deductions such as payroll withholdings under section 227.1 of the Income Tax Act, and unremitted GST/HST under section 323 of the Excise Tax Act. The two regimes are distinct, but the CRA may pursue both where the facts permit.

Defences and ways to challenge an assessment

A section 160 assessment is not the last word. Because the CRA must prove all four conditions, each one is a potential line of defence, and the dollar amount is frequently open to challenge as well.

Fair market value consideration was given. If the transferee paid full value for the property, there is no shortfall and no liability. Even where the consideration was less than full value, properly documenting what was actually given — cash, the assumption of a mortgage or other debt, the release of a legitimate obligation, or services — can reduce the assessed amount to the true shortfall. A spouse who took on the mortgage when the home was transferred, for example, gave consideration that must be credited.

The parties were dealing at arm's length. Where the transferor and transferee are not related by blood, marriage, or common-law partnership, whether they dealt at arm's length is a question of fact. Evidence that the transaction was a genuine, independent bargain between parties with separate interests can defeat the assessment.

Valuation. Section 160 depends entirely on two values: the fair market value of the property at the date of transfer, and the fair market value of the consideration given. The CRA's figures are not always correct. An independent valuation, supported where appropriate by an expert report, can show that the property was worth less than assessed or that the consideration was worth more than the CRA allowed. Either adjustment lowers the shortfall and the liability.

No underlying tax debt, or the wrong amount. If the transferor did not actually owe tax in or before the year of the transfer, the fourth condition fails. The transferee's liability is also capped by the transferor's actual debt, so if that debt is smaller than the CRA assumed, the cap moves down with it.

There was no transfer, or no benefit conferred. Sometimes property is held in trust, advanced as a genuine loan, or moved for reasons that do not amount to a gratuitous transfer of value. Establishing the true nature of the dealing can show that section 160 does not apply.

It is worth noting what is not a defence. Section 160 does not require any intention to avoid tax. The recipient may have had no idea the transferor owed anything to the CRA, and the assessment can still be valid. The absence of bad faith does not, on its own, answer a derivative assessment — which is why the focus belongs on the four conditions and the numbers.

No limitation period and the assessment process

One feature of section 160 sets it apart from most of the Income Tax Act. Under subsection 160(2), the CRA may assess a transferee at any time. There is no normal reassessment window and no statute of limitations. A transfer that took place many years ago can still be assessed today, long after the parties have forgotten the details or discarded the records. This is one of the reasons documentation matters so much: the evidence that supports a valuation or proves consideration was given may be the only thing standing between a transferee and a large bill years later.

A derivative assessment is issued the same way as any other assessment, by a Notice of Assessment sent to the transferee. The recipient has the usual rights to dispute it. The first step is generally a Notice of Objection, which must be filed within the statutory deadline — generally ninety days from the day the notice of assessment was sent, although individuals often have until the later of that date or one year after their filing-due date — to put the dispute before the CRA's Appeals Division. If the objection does not resolve the matter, the next step is an appeal to the Tax Court of Canada. Our page on tax disputes and objections explains the objection process and the strict deadlines that apply. Missing a deadline can be costly, so the assessment should be reviewed promptly.

While the dispute is underway, the CRA's collection machinery can also be in motion. The agency may register liens, garnish wages or bank accounts, or take other steps to collect a confirmed derivative liability. If collection activity has already started, our overview of CRA collections and garnishment describes what the agency can and cannot do and the options for managing it.

How section 160 interacts with planning

Section 160 is not a reason to avoid legitimate transfers of property between family members or related corporations. People restructure their affairs for many sound reasons, and most transfers never attract the CRA's attention. The provision becomes a concern in a specific situation: where the transferor has, or is about to have, a tax debt, and property is moving to a related party for less than full value. In that narrow zone, transfers should be approached carefully, with proper valuations and clear records of any consideration given.

Where a transferor already faces a tax debt, addressing that debt directly — through arrangements with the CRA or by resolving the underlying assessment — is often more productive than relying on the transfer to escape it. Our page on tax arrears negotiation describes options for managing an existing liability. Sound planning looks at the whole picture rather than a single transaction in isolation.

How Barrett Tax Law approaches this

When we review a section 160 file, we start with the four conditions and test each one against the facts and the documents. We examine whether there was truly a transfer of property, whether the parties were dealing at arm's length, what consideration actually changed hands, and whether the transferor owed tax in or before the year of the transfer. We look closely at the CRA's valuation of both the property and the consideration, because the assessed amount often does not reflect the true shortfall. Where the assessment is wrong in principle or in amount, we prepare and file the Notice of Objection, advance the legal arguments to the Appeals Division, and, where appropriate, carry the matter to the Tax Court of Canada. Where collection is already underway, we engage with CRA Collections in parallel.

Every derivative liability case turns on its own facts — the nature of the transfer, the relationship between the parties, the timing, and the numbers. If you have received a section 160 assessment, or you are concerned that a past transfer could expose you to one, we offer a free and confidential consultation to talk through your circumstances and explain the options available to you.