Article 160, Responsabilité – Damis Properties Inc. c. La Reine (Article en anglais)

8 minutes de lecture
28 septembre 2021

In Damis Properties Inc. v. The Queen ("Damis"), the Tax Court of Canada ("TCC") 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 subject property. The TCC further concluded that, even if subsection 160(1) applied, the liability of the appellants under paragraph 160(1)(e) was nil because they gave fair market value consideration.

The facts in Damis may be briefly summarized as follows. The appellants each owned a general partnership. Before selling certain farmland owned by the partnerships, each appellant incorporated a subsidiary and transferred their respective general partnership interests to the subsidiaries. After the farmland sale, proceeds from the sale were allocated to the subsidiaries in the form of either cash or cash and intercompany receivables. The appellants then sold their shares to a third-party buyer ("WTC"), under a share put agreement, for more than the after-tax value of the subsidiaries. WTC later paid for the shares using the cash or receivables in the subsidiaries.

Subsection 160(1) is an anti-avoidance rule, which applies where a transferor transfers property directly or indirectly to a non-arm's length (and certain other) transferee for less than fair market value ("FMV") consideration. Essentially, it makes the transferee and the transferor jointly and severally liable to pay the transferor's tax under the ITA, limited to the lesser of:

  1. The amount by which the property's FMV, when it was transferred, exceeded the FMV of the consideration; and
  2. The total of all amounts the transferor was liable to pay under the ITA in or in respect of the taxation year in which the property was transferred or any preceding year.

In interpreting subsection 160(1), the TCC primarily adopted a textual approach. It first considered whether there was property transferred by the subsidiaries, "either directly or indirectly by means of a trust or by any other means whatever," to the appellants. The TCC found an indirect transfer because there was a clear connection between the reduction in the property of the subsidiaries and the increase in the appellants' property.

The TCC then examined when the subsidiaries transferred the property to the appellants. It concluded from the present perfect tense of the phrase "has transferred" in the provision that the transfer under subsection 160(1) takes place only when all the steps required to carry out that transfer have happened. In this case, the transfer took place upon the conclusion of the final step in the transfer of the property to the appellants, which occurred when WTC transferred the property to the appellants to pay for the shares of the subsidiaries.

In determining 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 / legal control approach, it applied subsection 256(9) to determine the timing of the change in control. Since the transactions were completed at or before 12:38 pm 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 31, 2006. This was before the time of the transfer later that same day. Hence, the TCC concluded that the appellants and the subsidiaries were not related and therefore 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 stated to be whether the parties acted in their own interests. The TCC noted that no evidence suggested that the appellants continued to control the activities of the subsidiaries or acted in concert with WTC to direct the subsidiaries' actions at the time of the transfer. Therefore, the TCC concluded that all of their actions were consistent with their separate interests and that they were dealing at arm's length at the time of the transfer. Accordingly, it found that subsection 160(1) did not apply.

Assuming subsection 160(1) did apply, the TCC then assessed the tax liability under the provision by determining the value of the consideration given for the property. It interpreted the words "consideration given for the property" to mean consideration given by the transferee for the property regardless of who receives that consideration. In this case, the appellants gave consideration for the property in the form of the shares in the subsidiaries, which is at FMV because the price reflected each party's independent interests. Therefore, the liability of the appellants under subparagraph 160(1)(e)(i) was determined to be nil.

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

Budget 2021 enhancements to subsection 160(1)

Budget 2021 proposed to strengthen the CRA's collection efforts by stopping perceived abusive tax debt avoidance schemes designed to circumvent the application of subsection 160(1). In certain circumstances, the application of subsection 160(1) was enhanced, for transfers of property that occurred on or after Budget Day, to prevent planning to technically avoid subsection 160(1) by:

  1. Arranging for a tax debt to crystallize after the end of the taxation year in which the property transfer occurs, by deeming the tax debt to have arisen in the taxation year in which the property was transferred;
  2. Arranging for the transferor to be dealing at arm's length with the transferee at the time of the property transfer, by deeming them to not having been dealing with each other at arm's length; or
  3. Stripping out net asset value of the transferor using a series of transactions that does not breach the point-in-time valuation test for the property transferred and consideration given therefor, by determining these values based on the overall result of the series of transactions, rather than simply using the values at the time of transfer.

Planners and promoters of these tax debt avoidance schemes also face penalties equal to the lesser of:

  1. 50% of the tax that is attempted to be avoided; and
  2. $100,000 plus the planner's or promoter's compensation for the scheme.

These changes afford the CRA enhanced tools to deploy when seeking recovery from taxpayers under subsection 160(1). With the massive and seemingly ever increasing deficits over the past several years, the CRA will certainly be considering all potential avenues to achieve the demanding task of increasing tax revenues.

Should you have any specific questions about this article or would like to discuss it further, you can contact the author or a member of our Tax Dispute Resolution Group.

This article was co-authored with Xin Jiang during her time as a summer student in Gowling WLG's Toronto office.


[1] All statutory references are to the Income Tax Act (Canada) ("ITA").


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