A section of the tax act that massively increases the agency’s collection ability stops short of including beneficiaries
Those with income-tax debt may not be aware of Section 160, a legal provision that gives the Canada Revenue Agency (CRA) license to pursue those who receive property from a tax debtor. The law is designed to prevent taxpayers from dodging tax liability by transferring property to a “non-arm’s length person” — a label that applies to spouses, common-law partners, a child who was under 18 years of age during the transfer of property, or any person with whom the debtor was not dealing at arm’s length.
“[W]hile the transferor remains liable for the tax debt, the recipient now becomes independently liable for the transferor's tax debt as of the date of the transfer,” explained David Rotfleisch from tax law firm Rotfleisch & Samulovitch P.C. in a recent commentary.
Section 160 is a powerful legal tool for the CRA, he said. Not only does it allow the agency to pursue the recipients with its full arsenal of tax-collection powers, it also does not consider the original debtor’s intent. In other words, people with tax debt could unwittingly extend their tax liability to loved ones who receive property from them.
But according to Rotfleisch, that power doesn’t extend to life insurance payouts that loved ones benefit from after a debtor’s death. “To focus the analysis, we assume that the life-insurance policy's owner is the person whose life is insured, and that the life-insurance beneficiary is a party related to the policy owner,” he said.
For one thing, Rotfleisch argued, taking out an insurance policy with a named beneficiary isn’t the same as an arm’s-length transfer of property. The funds that the policy owner pays toward premiums vest in the insurance company, who typically is the party that the policy owner deals with at arm’s length. Also, since the total premium payments may undershoot or surpass the death benefit, the payments ultimately paid by the policy owner has no relation with the amount the beneficiary shall receive upon the policy owner’s death.
“In other words, it seems unlikely that the policy owner's premium payments could be construed as an indirect transfer to the beneficiary by way of funding the insurance proceeds,” he said, adding that beneficiaries do not receive anything until after the policy owner’s death.
Roetflisch also made note of two cases heard in Tax Court — Nguyen v Canada and Higgins v The Queen — where it was found that section 160 cannot be applied to a life insurance beneficiary.
“Although the Nguyen court focused on whether funds belonged to an estate by virtue of the fact that they sat in a bank account in the estate's name, the court's reasoning presupposed that section 160 does not apply to one who receives life-insurance proceeds from an insurer,” Roetflisch said. “The Higgins decision comes even closer to announcing that section 160 fails to apply to a life-insurance beneficiary.”
Finally, he argued that applying section 160 to the beneficiary of a life-insurance policy goes against the rule’s underlying purpose. Among other things, Rotfleisch said, the section aims to “preserve the value of the existing assets in the taxpayer for collection by the CRA.
“[T]he insurance proceeds that would be payable to the life-insurance beneficiary don't come from—and thus don't undermine the value of—the policy owner's assets,” he noted.
