Shareholders may become liable for a corporation’s taxes

It is well-established in law that the shareholders of a corporation are generally immune from the the debts of the corporation.* This includes tax debts of a corporation. However, a shareholder who receives dividends from a corporation that owes tax may become liable for part or all of the corporation’s tax debt under section 160 of the Income Tax Act. That section applies when a tax debtor transfers property to a non-arm’s length party for inadequate consideration. There is no limitation period for a section 160 reassessment, so the CRA can reach through the corporation to recover its tax debt from the shareholder at any point in future. Whenever bankruptcy or dissolution is considered for an insolvent corporation, any potential future implications for shareholders under section 160 should therefore be considered. If the CRA does not succeed in recovering from the corporation, it may redirect collection efforts toward a shareholder. In a case before the Alberta courts now, a shareholder was reassessed under section 160 for almost $1.8M - the amount of a dividend it had received. The shareholder then sued its tax counsel for negligence approximately 10 years after receiving legal advice in relation to the dividend. The lawyers recently failed in their application to dismiss the lawsuit for delay, so it remains to be seen who will ultimately pay the corporation’s tax debt - the shareholder or its legal counsel.

*There are exceptions to this general principle.

Kenneth Kolarsky