Here is a true story that illustrates that even in a loving relationship, caution is needed when transfers of property occur.
Under Section 160 of our Tax Code, there is no time limitation on the CRA’s right to assess a transferee of property for taxes owing. Spouses may be divorced or widowed. Business partners may long since have dissolved their ties. Friends may go their separate ways. Notwithstanding any or all of the above, the tax liability remains.
Here is a nightmare scenario illustrating how that can play out. Let’s say we have a couple about to get married. We’ll call them Jim and Jane. In their prenuptial agreement, Jim transfers what will become their matrimonial home to Jane. At that time, Jim has a large amount of income taxes due – which he conveniently doesn’t mention to Jane. A few years into the marriage, Jim becomes ill and cannot carry on with his business. All the financial resources Jane brought into the marriage – considerably more than the value of the home – are spent to keep them afloat. Ultimately, Jim declares bankruptcy and is granted an absolute discharge.
Time passes and Jim and Jane divorce. Jane mortgages the home to satisfy Jim’s rights under family law to half of the matrimonial home’s fair market value. Then out of the blue Section 160 comes back to haunt Jane. Seeking repayment of Jim’s unpaid tax debt, the CRA puts a lien against the home in the amount of its fair market value at the time of transfer to Jane. Now she is stuck with the tax debt – even though Jane was unaware of Jim’s tax liability, even though half of the home’s value has been paid to Jim under the family law rules, and even though her only resource is the mortgaged home.
Jane was not our client. We would have checked with the CRA as to whether Jim owed taxes before doing such a transaction.
Bottom Line: Love should not be blind when assets are being dealt with by a couple contemplating marriage. Caution is the watchword.
The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.