Business owners often move assets as part of normal operations. Funds flow between corporations, shareholders draw money for personal use, family trusts are funded, and restructurings take place to support growth or succession planning. What many entrepreneurs do not realize is that Section 160 of the Income Tax Act can transform these routine decisions into personal liability for someone who never owed the tax in the first place.
Section 160 is not a tax avoidance rule. It is a collection rule. Its purpose is to allow the Canada Revenue Agency to recover unpaid taxes by pursuing people who received property from a taxpayer, even if those people acted honestly and had no knowledge of the tax debt. Because of this, Section 160 assessments often come as a surprise years after a transaction has closed.
For CRA to assess liability under Section 160, it must prove four specific elements. First, there must be a tax debt. The original taxpayer must owe income tax, either at the time the property was transferred or for the taxation year in which the transfer occurred. Importantly, CRA does not need the tax to have been assessed yet at the time of the transfer. Later reassessments can still trigger Section 160 exposure.
Second, there must be a transfer of property. The definition of property is extremely broad. It includes cash, shares, real estate, receivables, debt forgiveness, and even the payment of personal expenses by a corporation. In a business context, shareholder withdrawals, intercompany transfers, and informal movements of funds are common sources of risk.
Third, the transfer must be between non arm’s length parties. This typically includes transfers between spouses, parents and children, family trusts, and corporations controlled by the same individual or group. Many closely held businesses fall squarely within this category, even when transactions appear routine or commercially motivated.
Fourth, the property must have been transferred for less than fair market value consideration. If full fair market value was not paid and properly documented, the recipient can become jointly and severally liable for the transferor’s tax debt. The liability is limited to the value of what was received, minus any real consideration paid, but that amount can still be significant.
One of the most powerful aspects of Section 160 is CRA’s ability to trace property. CRA can follow the value of property after it has changed form. If a business owner withdraws cash from a corporation and later uses that money to purchase another asset, CRA can still treat the original transfer as the basis for liability. The fair market value is fixed at the time of transfer, not when CRA later comes calling. There is also no limitation period. Section 160 assessments can be issued decades later.
Unlike many other areas of tax law, there is no due diligence defence under Section 160. A recipient does not escape liability by acting honestly, relying on professional advice, or being unaware of the tax debt. Insolvency of the original taxpayer does not help either. CRA routinely uses Section 160 to bypass bankrupt individuals or dissolved corporations and pursue recipients directly.
For business owners, Section 160 issues frequently arise during corporate reorganizations, shareholder distributions, estate and succession planning, and informal financial practices that evolve over time. Paying personal expenses through a corporation, forgiving shareholder loans, redeeming shares at an undervalue, or transferring assets to family members without proper valuation are all common triggers.
The good news is that Section 160 exposure is often preventable. Fair market value must be established at the time of transfer. Consideration must be real, measurable, and supported by evidence. Loans must be genuine and actually repaid. Corporate records must reflect what truly occurred, not just what was intended. In disputes, outcomes often turn on documentation, valuation evidence, and whether CRA can actually prove a transfer of property occurred.
At Rabideau Law, we regularly advise business owners on asset movements, corporate restructurings, shareholder transactions, and CRA audit exposure with Section 160 in mind.
If you operate a business and are considering moving assets within your corporate or family structure, understanding Section 160 before the transaction occurs is critical. And if CRA has already raised Section 160 in an audit or assessment, early legal advice can help protect both your business and your personal assets.
