ITA section 160 and s. 325 of the ETA (the GST law) say that if someone who owes tax transfers property to you for less than its value, you could be liable for his tax debts, up to the value of the benefit you got by the below-market transfer. This rule applies even if you didn't know that the transferor owed taxes and can apply even if the transferor has become bankrupt (so no longer owes the taxes). And CRA may pursue you at any time; there's no limitation period. It's a powerful collection tool.
In the past, the FCA and the TCC have said that a person can be liable even if she just loaned her bank account to the transferor -- never used the money but gave it back to the transferor on demand, even immediately upon deposit.
In one case, a mother gave her son her bank card; he deposited his cheques, withdrew the money immediately; she never got a cent. The CRA accepted that the mother and son had agreed that "all monies would be preserved for the son as the fruit of his labours and never were, nor were ever intended to be, the property of the [mother]." Yet the TCC ordered her to pay $56,000 of her sons tax debts. She got nothing and she paid $56,000 for it. (Brauer v. The Queen, (2012 TCC Bocock))
Justice Bocock concluded that the law is clear, Mrs. Brauer owed the money, even though she had no benefit from it. In deciding this, Bocock J. relied on the FCA decision in Canada v. Livingston, 2008 FCA. In both cases, the transferee knew that the tax debtor owed taxes and that CRA was trying to collect. Neither the FCA's decision in Lemire nor the decision in 9101-2310 Québec Inc. would change that result. But both these new FCA decisions loosen the strictness of the non-arm's length collection rules.
The main decision is the one in 9101-2310 Québec Inc. (In Lemire, at para. 30, Noel JA just adopts his reasons from 9101-2310 on the scope of the Livingston rule.) In 9101, Noel JA restated the Livingston rule more restrictively this way:
" The rule to be gleaned from [Livingston], as I understand it, is that the transfer of legal title in a sum of money may give rise to a transfer for the purposes of subsection 160(1) where it is intended to conceal the fact that the tax debtor is the beneficial owner of this sum and thwart the tax authorities’ collection efforts."
A bit confusing in this principle is the fact that Justice Noel also said that: "it is impossible to attribute any value to this right unless one accepts as a given that the mandatary [an "agent" in Quebec Civil Law] was going to use the right to withdraw funds for his personal benefit." (Para. 58.) So, if the non-arm's length collection rule only applies to the value of the property transferred, you would think that it shouldn't matter whether mother and son, or spouse and spouse, intended to deceive the tax authorities. If Mrs. Brauer, the transferee got no value, she shouldn't be liable. But it seems that the FCA didn't want to go so far.
A rule in article 1452 of the Civil Code of Quebec says that third parties can treat an apparent contractual relationship as binding on the deceiving parties. So, if two persons, to avoid creditors (such as the Federal Business Development Bank in 9101), pretend that the tax debtor's money belongs to the transferee, the CRA can treat the money as the property of the transferee and seize it. (Paras. 35 and 61 of the 9101 case.) Whether or not there is a similar rule under agency law in common law provinces, the Livingston decision seems to recognize such a rule.
In Lemire, Ms. Lemire acted as a cheque-clearing service for her common-law spouse. The TCC judge (and the FCA) accepted that she did not do that to help her spouse avoid tax or other debts but because his bank held funds in his account, making it hard for him to carry on his accounting business. On those facts, the FCA said Ms. Lemire was not liable for the spouse's taxes, despite having cleared about $686,000 of money through her account over a 4-year period, while the spouse owed about $280,000.
The FCA in its remarks in 9101 made an important note about the role of provincial property law in tax affairs. It's good to keep the rule in mind:
" A brief comment on the role of provincial law in the application of the Act is also appropriate. It is settled law that unless Parliament provides otherwise, the private law of the provinces plays a suppletive role (see section 8.1 of the Interpretation Act, R.S.C., 1985, c. I-21), so that a transfer of the ownership of property for the purposes of the Act takes place where ownership has changed under the civil law of Quebec or the common law of each of the other provinces of Canada depending on where the cause of action arises."
This rule applies more broadly than just to property transfers. Provinces have jurisdiction over "Property and Civil Rights in the Province" (Constitution Acts, 1867 to 1982, s. 92. para. 13.) So, for example, if you are deciding whether two persons are partners for income tax purposes, you must turn to the provincial laws. Similarly, if there's a question about whether parties had a contract, generally provincial law applies to decide the question.
See Canada c. Lemire, (2013 CAF Noel); and Canada v. 9101-2310 Québec Inc. (2013 FCA Noel)