Section 160 and Dividends: When Paying Yourself Inherits the Company's Tax Debt

Section 160 of the Income Tax Act exists for a straightforward reason: to stop taxpayers from moving assets out of reach of the CRA's collectors by transferring them to a spouse, a family member, or a related corporation, right before or after a tax debt comes due. The provision is deliberately broad, and the courts have consistently read it that way. A 2025 Tax Court decision is a useful, current reminder of exactly how far that reach extends into something as routine as a corporate dividend.

What Section 160 Actually Says

Under subsection 160(1), when a person transfers property, directly or indirectly, to a spouse or common-law partner, a person under 18, or anyone else they don't deal with at arm's length, and the transferor owes tax under the Act at the time, the transferee becomes jointly and severally liable for that tax debt, up to the fair market value of what was transferred, minus any consideration the transferee actually gave in return (SpenceDrake Tax Law, 2025). The parallel provision for GST/HST debts is Section 325 of the Excise Tax Act, operating on the same logic (Taxpage, 2025). The mechanism doesn't require any intent to avoid tax. A transfer that had nothing to do with tax planning can still trigger it, provided the underlying facts, a non-arm's length transfer for inadequate consideration while a tax debt existed, are present.

Why Dividends Are Uniquely Dangerous

The reason dividends specifically show up so often in Section 160 cases traces back to a foundational point the Supreme Court of Canada made in Neuman v. M.N.R.: a dividend is a payment tied to an entitlement arising from share ownership, not consideration for anything the shareholder did (SpenceDrake Tax Law, 2025). That means the "I gave fair value in return" defence, which works cleanly for salary paid in exchange for services actually rendered, generally doesn't work for a dividend at all. The Tax Court applied exactly this reasoning in Paul v. The Queen, finding that shareholders receive dividends purely because of their share rights, so no consideration passes from the shareholder to the corporation in connection with that payment (SpenceDrake Tax Law, 2025). Salary, by contrast, is consideration for services and does not attract the same automatic exposure.

The 2025 McCague Decision

McCague v. The King, 2025 TCC 59, is a useful recent illustration of how this plays out for a small, closely-held corporation. The taxpayer owned exactly 50% of a numbered Ontario construction company; the other 50% belonged to an unrelated business partner. While the corporation owed more than $76,000 in tax, it paid a dividend to both shareholders, and the CRA assessed each of them personally under Section 160 for the resulting liability (Canadian Accountant, 2025). The taxpayer argued that because he owned exactly half the company and wasn't related to the other owner, the two of them dealt at arm's length, which should have taken the dividend outside Section 160's reach entirely.

The Tax Court found otherwise. Justice Ezri concluded that although the two shareholders weren't related in the technical sense, they had acted "in concert" and shared a "common economic interest" in declaring and receiving the dividend, which was enough to establish the required non-arm's length relationship for Section 160 purposes (Advotax Law, 2025). The decision reinforces a point that catches a lot of business owners off guard: an arm's length argument based purely on ownership percentage and lack of family relationship can fail if the shareholders' actual conduct shows them acting together with a shared interest in the outcome.

The Narrow Defences That Exist

Three defences are generally available to a Section 160 assessment, and they're narrow by design.

First, the transferee can show the transferor didn't actually owe tax at the time of the transfer, which sometimes involves disputing the underlying assessment itself. Second, the transferee can show they provided fair market value consideration in exchange for what they received, which as discussed above is difficult for a dividend specifically. Third, the transferee can argue the transferred property had no fair market value, which as a practical matter is rarely a workable argument, since a worthless transfer usually wouldn't have happened in the first place (Ira Smith Trustee & Receiver Inc., 2022). There's also a procedural nuance worth knowing: when the facts about the underlying tax debt are known only to the CRA, courts have sometimes shifted the burden onto the CRA to prove that debt existed, rather than leaving the taxpayer to disprove it, as would normally be the rule in a Canadian tax dispute (Mondaq, 2025).

No Time Limit, No Due Diligence Defence

Two features of Section 160 make it unusually harsh compared to most of the Income Tax Act. There is no limitation period; the Supreme Court of Canada confirmed in Addison & Leyen Ltd. that the Minister can assess a transferee at any time, with no statute-barred date ever applying (Dentons, n.d.). And unlike many other provisions, there is no due diligence defence available. It doesn't matter whether the transferee knew about the underlying tax debt, acted in good faith, or had no idea anything was wrong; the test turns on the objective facts of the transfer, not on anyone's state of mind (SpenceDrake Tax Law, 2025).

A Practical Framework

1. Confirm the corporation's tax accounts are current before declaring a dividend, not just its bank balance, since a filed but unpaid tax debt is enough to trigger exposure.
2. Consider salary or a bona fide loan repayment over a dividend when a corporation's tax position is uncertain, since both can constitute consideration in a way a dividend cannot.
3. Document any non-arm's length co-shareholder relationship carefully, since acting "in concert" with a common economic interest can defeat an arm's length argument even without a family or ownership-percentage connection.
4. Don't assume a clean CRA account today means no future exposure, given the absence of a limitation period on Section 160 assessments.
5. Get a professional review before any significant non-arm's length transfer, dividend or otherwise, out of a corporation carrying any tax uncertainty.