Can a buyer be held liable for the seller’s unpaid tax?

Section 160 of the Income Tax Act can make the person who receives property jointly liable for tax that the transferor owes. It is aimed at transfers between connected people, so it matters most where a business passes within a family or between other non-arm’s-length parties.

Who falls within section 160

The provision applies where a person transferred property, directly or indirectly, to a spouse or common-law partner, to someone under 18, or to a person the transferor was not dealing with at arm’s length. An arm’s-length buyer sits outside those categories, but other rules can still reach one, for example section 116 of the Income Tax Act where the seller is a non-resident (see whether a buyer is liable for not withholding from a non-resident seller). Whether two parties deal at arm’s length is a tax-law question rather than a matter of how well they get along, so an advisor should apply it to the actual facts.

How far the liability goes

Where the section applies, transferee and transferor are jointly and severally liable, so the CRA can pursue either. The amount is capped at the lesser of two figures: how far the property’s fair market value exceeded the value of what the transferee gave for it, and the total the transferor owes under the Act for the year of transfer and earlier years. A transferee who gave full value faces a cap of zero on that limb, while paying less than value raises it. A second, narrower limb covers extra tax arising from the Act’s income-attribution rules on the transferred property.

What the CRA’s sale guidance does not say

The CRA’s page on selling a business places account closure on the seller, who must close payroll and GST/HST accounts, and its page on closing program accounts says an owner closing a payroll account must remit all source deductions and file final payroll returns. Neither page discusses a buyer’s liability for what the seller owes, so a buyer cannot treat those steps as proof that the seller’s tax position is clean. Whether penalties and interest count toward the cap is a question for a tax advisor.