TaxMatters@EY – April 2020

The Canada Revenue Agency (CRA), the US Internal Revenue Service (IRS) and other tax authorities have long warned the public about fraudulent communications, commonly referred to as scams or phishing. Thousands of Canadians have fallen victim to these schemes, costing them millions in losses.

Unfortunately, scammers continue to become increasingly sophisticated. Organized groups originate from domestic and international locations and can relocate quickly if needed, making it even more challenging for law enforcement to protect Canadians.

With personal tax season now in full swing, it’s a good time for a reminder of the common types of CRA scams and how to distinguish them from legitimate CRA communications.

Common types of scams

Fraudulent CRA communications come in a variety of methods, including by phone, mail, email and instant messaging. A common scam is a phone call or email which claims to come from a CRA employee informing an individual they have an outstanding tax debt and threatening criminal charges or imprisonment unless it is paid immediately through e-transfer or a prepaid credit card.

Other scammers may contact an individual by email and inform them that they are required to update or verify personal or financial information to receive their tax refund from the CRA. These emails may request that the individual provide their social insurance number, credit card or bank account information, or a scan of their driver’s licence or passport.

Another common example involves an email or text claiming to be from the CRA stating that the individual is entitled to a benefit or has overpaid tax and has been issued a refund. The email provides an attachment or a link to a fraudulent CRA page and the individual is required to provide personal or financial information to receive the benefit or refund.

Distinguishing between legitimate CRA communications and scams

It can be difficult to distinguish between a real CRA communication and a scam. The more sophisticated scams can involve spoofing caller IDs, display names and phone numbers to appear to legitimately be from the CRA. Scams often involve what appear to be legitimate-looking CRA images, links, landing pages and forms.

To combat these scams, the CRA’s website provides general guidelines for identifying communications that do not originate from them¹.

Phone calls – At times, the CRA may call a taxpayer to begin an audit, or to offer small business tax help free of charge. As noted on the CRA’s website, during phone calls, the CRA representative may ask for personal information, such as an address, social insurance number or business account number, to verify a taxpayer’s identity. As listed below, certain behaviours and requests from the caller can make it easier to identify a scam, such as aggressive or threatening language, but this is not always the case. If you feel unsure as to whether the call is legitimate, ask the caller for their name, phone number, work section and office location so that you can verify their identify before providing any personal information over the phone.²

Email – Legitimate CRA email communications may notify a taxpayer of a new message or a document available for viewing in secure CRA portals like My Account, My Business Account or Represent a Client. The CRA may also send an email providing a link to a CRA webpage, form or publication that was requested by the taxpayer during a phone call or a meeting with the CRA. The CRA’s website clearly states that this is the only time the CRA will send an email communication containing links.

Regular mail – Legitimate CRA mail communications can include a notice of assessment or reassessment, a request for the name or location of a taxpayer’s bank and a request for payment of an amount owed through a legitimate CRA payment option. The CRA may also inform a taxpayer that legal action is being initiated to recover money owed, to begin an audit or to offer small business tax help free of charge. If you receive correspondence that may not appear legitimate or that is inconsistent with your tax situation, you can contact the CRA to confirm that the information is in fact legitimate. This information may also be available in secure CRA portals like My Account and My Business Account, or through the CRA mobile web apps MyCRA and MyBenefits.

Instant messaging and text messages – The CRA does not communicate with taxpayers by text message or instant messaging such as Facebook Messenger or WhatsApp.

To provide further clarification, the CRA states clearly on its website that it will never:

• Use aggressive or threatening language
• Threaten arrest or imprisonment
• Demand immediate payment of a tax debt by way of an e-transfer, prepaid credit card, gift card or bitcoin
• Set up a meeting with an individual in a public place to collect a payment
• Give or ask for personal or financial information by email
• Send an email with a link requesting that an online form with personal or financial details be completed or an email with a link to a tax refund
• Send documents or forms unless specifically requested to do so by the taxpayer
• Request information about a passport, driver’s licence, or health card
• Divulge taxpayer information to another person unless the taxpayer provides formal authorization
• Leave a threatening message or personal information on voicemail
• Ask taxpayers to leave a message with their personal information on voicemail

The CRA also provides a number of examples and scenarios of fraudulent phone calls, emails, letters, text messages and online refund forms on its website.

Protect yourself and others

While the sophistication of new schemes is continuously evolving, there are ways taxpayers can protect themselves.

Even if the CRA communication you receive appears legitimate, take a moment to ask yourself whether the information provided or requested is reasonable in light of your tax situation. You should not feel pressured to act immediately. It is common for scammers to invoke fear by creating a false sense of urgency. However, if you do owe money to the CRA and are unable to pay the amount in full, proactively contact the CRA’s collection group to make arrangements.

If you’re unsure of whether a CRA communication is legitimate, you should check your account online using the CRA portals or contact the CRA general enquiry line before taking any further action. If you haven’t yet done so, you should register with My Account or My Business Account and sign up for email notifications of changes made to your account, such as a change of address or direct deposit information, or if paper mail from the CRA was returned.

Stay vigilant to protect your identity, including passwords and access codes. Scams are not limited to individuals impersonating the CRA and the IRS and may involve, for example, other government agencies, utility companies and businesses.

You should always be very cautious in providing personal information to any party and should never provide personal or financial information online or by email. Any request for personal information should be assessed to determine why the information is required and whether the information will be protected.

You should also not click on links or open attachments that are included in suspicious emails or emails from unknown parties. Links can also be received via text messages. These links may be a phishing attempt to steal personal information or may contain embedded malicious software that can harm a computer and jeopardize personal information. Also ensure that any antivirus, security patches or fixes, and internet security programs are up to date.

Although anyone can be the victim of a scam, seniors are often targeted by scammers. Seniors are often thought to have more savings and investments, and may be more likely to be socially isolated or have an impairment affecting their ability to make sound financial decisions. Seniors may also be more susceptible to scams involving scare tactics and pressure, and are often less informed about cyber risks. Family and friends should engage in conversations with seniors to ensure they are aware of common scams, why they may be particularly vulnerable, and how they can protect themselves from being a victim. Local police departments often hold fraud prevention seminars in long-term care residence and retirement homes.

Individuals who have been, or suspect they have been, a victim of a scam should contact the Canadian Anti-Fraud Centre and their local police department. The CRA should also be contacted if a CRA user ID or password was compromised in order to disable or reactivate online CRA access.

Conclusion

Although scams seem to be more prevalent during tax time, they can happen any time of the year and scammers are always finding new methods to take advantage of their intended victims. It is important to stay vigilant year round. Proceed with caution when sharing personal or financial information to ensure you’re dealing with a legitimate CRA representative and ensure paper and electronic documents are saved in a secure location.

The CRA continues to proactively warn taxpayers about recent scams through various communications, including social media sites. In addition to the information provided by the CRA, individuals can stay informed through news reports and by regularly visiting trusted websites, including federal and provincial government sites, the Canadian Anti-Fraud Centre, the Competition Bureau and the Royal Canadian Mounted Police.

by Winnie Szeto, Toronto

The Tax Court of Canada (TCC) found that a deposit of funds by a husband into a joint account shared with his wife does not constitute a transfer of property for purposes of section 160 of the Income Tax Act¹ (ITA) and section 325 of the Excise Tax Act² (ETA). These two provisions give the Canada Revenue Agency (CRA) significant powers to collect income tax and GST/HST debts of a taxpayer from a person to whom the taxpayer has transferred assets.

Facts

Mr. and Mrs. A were married in 1984 and have had a joint bank account since that time. For the past 35 years, Mr. and Mrs. A have used the funds in the joint account to pay for their personal and family expenses.

In 1993, Mr. A became 50% owner of a logging company. In 2004, the company began to experience financial difficulties, and by 2006 it had sold all of its assets and ceased operations. At the time the company ceased its business, it had not remitted to the CRA amounts it had withheld as source deductions under the ITA and amounts it owed as net tax under the ETA.

As a result of the company’s financial difficulties, Mrs. A sold the home that she lived in with her family. This home was inherited from her father. She used approximately $500,000 of the proceeds from the sale of the home to pay off a credit line that was secured by the home. Mr. A had used funds from the credit line to make capital contributions to the company. Mrs. A then used the majority of the remaining proceeds to purchase a smaller home for the family to live in. Mrs. A was the sole owner of this new home.

In 2009, the CRA first assessed Mr. A, as director of the company, for unremitted source deductions, penalties and interest under section 227.1 of the ITA and for net tax, penalties and interest under subsection 323(1) of the ETA.

After the failure of his business, Mr. A was not employed full time until March 2013. From March 15, 2013 to March 26, 2014, Mr. A received employment income of $89,806, which he deposited into the joint bank account. On March 26, 2014, Mr. A entered into a consumer proposal under the Bankruptcy and Insolvency Act³.

In the late 1990s, Mrs. A opened a bank account in her own name. At the time, she received a salary of $500 per month from the company. She deposited this amount into her personal bank account and used the funds to purchase items for herself and her children. From March 2013 to May 2015, Mrs. A worked at a local retail store. She deposited her earnings from this employment into her personal bank account and used the funds to pay family expenses.

During the relevant period, amounts were transferred from the joint bank account to Mrs. A’s personal account. Mrs. A used the transferred funds to pay family expenses.

Mortgage payments, utilities and insurance for the family home, as well as insurance for certain vehicles owned by Mrs. A, were paid out of the joint bank account.

As of March 1, 2016, it was determined that Mr. A owed the CRA $49,962 in respect of his assessment for unremitted source deductions under the ITA and $90,886 in respect of his assessment for net tax under the ETA. As a result, on March 1, 2016, the CRA assessed Mrs. A $49,962 under section 160 of the ITA and $90,886 under section 325 of the ETA. These assessments were based on CRA’s view that Mr. A transferred those amounts to Mrs. A between March 15, 2013 and October 30, 2015.

Mrs. A appealed both assessments to the TCC.

At trial, the minister of national revenue had dropped its pursuit of the amount of $49,962 under section 160 of the ITA because it had accepted Mrs. A’s argument that any purported transfers made after the date of the consumer proposal were beyond the scope of the assessments at issue. Furthermore, the minister reduced the amount pursued under section 325 of the ETA to $89,806, which is the actual amount that Mr. A purportedly transferred to Mrs. A between March 15, 2013 and March 26, 2014.

TCC decision

At the outset, the court noted that one of the purposes of subsection 160(1) of the ITA and subsection 325(1) of the ETA is to prevent a taxpayer from transferring property to their spouse in order to prevent the CRA from collecting tax debts that are owed by them.

The court referred to The Queen v Livingston⁴, where the Federal Court of Appeal set out the following four criteria that should be applied when considering subsection 160(1) of the ITA:

1. The transferor must be liable to pay tax under the ITA at the time of transfer.
2. There must be a transfer of property, either directly or indirectly, by means of a trust or by any other means whatever.
3. The transferee must either be either:
   1. The transferor’s spouse or common-law partner at the time of transfer or a person who has since become the person’s spouse or common-law partner
   2. A person who was under 18 years of age at the time of transfer
   3. A person with whom the transferor was not dealing at arm’s length
4. The fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee.

The court indicated that these four criteria also applied to subsection 325(1) of the ETA. Furthermore, the only issue at trial was criteria #2 — whether Mr. A transferred property, directly or indirectly, by means of a trust or by any other means whatever, to Mrs. A.⁵

The minister argued that a transfer of property occurred when Mr. A deposited his employment income of $89,806 into the joint bank account. However, Mrs. A argued that a transfer did not occur at that time because Mr. A still had control of the funds and they could be seized by the CRA or a third party.

In its reasoning, the court first quoted the case of Fasken Estate v Minister of National Revenue⁶:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

In applying Fasken Estate, the court was of the view that the deposit of funds into a joint account does not in and of itself constitute a transfer of property. Mr. A did not divest himself of the funds when he deposited them into the joint bank account. He continued to have full access to the funds and he used the funds to pay for his personal and family expenses.

The court was also of the view that by depositing his earnings into the joint bank account, Mr. A did not impede or obstruct the minister's efforts to collect any tax that he owed. The court noted that the minister could have taken collection action with respect to the funds in the joint bank account. However, the court found that a transfer did occur when Mrs. A removed the funds from the joint bank account.

The court noted that its conclusion was consistent with the decision in White v The Queen,⁷ where the court, relying on previous jurisprudence,⁸ found that a deposit of funds by a husband into a joint bank account with his spouse did not constitute a transfer of property for the purposes of section 160 of the ITA. However, that court found that there was a transfer of property when the spouse subsequently used the funds to pay off a mortgage on a home that she owned alone.

The court also noted that its conclusion was consistent with the Federal Court of Appeal’s decision in Yates v Canada.⁹ In that case, the court found that a transfer of property did not occur when the taxpayer deposited amounts into two joint bank accounts, but only occurred when he subsequently divested himself of the right to the money in the bank accounts by removing his name from those joint bank accounts.

Based on the above, the court concluded that of all the amounts deposited by Mr. A into the joint bank account between March 1, 2013 and March 26, 2014, only the following amounts constituted a transfer to his wife:

• Amounts transferred from the joint bank account to Mrs. A’s personal bank account
• Amounts transferred from the joint bank account to a line of credit account owned by Mrs. A; the funds in this account were used to buy a piece of land that the couple had hoped could be used to build a new family home
• Amounts transferred from the joint bank account to make mortgage payments on the family home; these payments represented a transfer to Mrs. A because she was the sole owner of the family home

The court found that the total amount transferred from the joint account to Mrs. A was $34,052. As a result, Mrs. A was liable for this amount under subsection 325(1) of the ETA.

Lessons learned

Taxpayers should be mindful of the CRA’s authority to collect unpaid tax debts under section 160 of the ITA and section 325 of the ETA, as these provisions are often overlooked in conducting one’s financial affairs.

While this case confirms that the depositing of funds into a joint bank account by one spouse is not automatically a transfer to the other spouse for purposes of those sections of the respective acts, it is important to recognize that the ultimate use of the funds is the key in determining if a transfer of property has occurred.

Tax Alert 2020 No. 21 – Saskatchewan Government support
On 20 March 2020, the Saskatchewan Government announced new funding and supportive measures to reduce costs for businesses and individuals, providing support to self-employed individuals not covered by new federal support measures, and established a Business Response Team designated to support Saskatchewan businesses during this time of uncertainty.

Tax Alert 2020 No. 22 – BC relief plan
On 23 March 2020, the BC Government announced a $5b relief plan for BC residents and businesses affected by the current situation. This plan includes $2.8b in support for individuals to weather the crisis and $2.2b in relief for businesses and economic recovery.

Tax Alert 2020 No. 25 – Federal Economic Response Plan: Additional filing deadline extensions
On 26 March 2020, the CRA announced certain filing deadline extensions, in addition to those announced in the government’s Economic Response Plan, which was released on 18 March 2020 (see EY Tax Alert 2020 Issues No. 15 and No. 20 for more information).

Tax Alert 2020 No. 27 – Canada announces deferral of Customs duties and import GST payments
During a press conference on 27 March 2020, Canadian Prime Minister Justin Trudeau announced that month-end payments of customs duties and GST on imported goods will be deferred until 30 June 2020.