At the heart of the case was section 160(1) of the\u00a0Income Tax Act, which allows the government to recover unpaid taxes from a person who is not acting at\u00a0arm\u2019s length<\/a>\u00a0and receives property from a taxpayer debtor without adequate consideration. The Court ultimately allowed the CRA\u2019s appeal in part, finding that liability existed, but only to a limited extent.<\/p>\n Facts of the Case in Canada v. Microbjo Properties Inc.<\/p>\n The respondents were corporations that indirectly owned farmland in Ontario. They agreed to sell the land, which would generate significant taxable income \u2014 approximately $17 million.<\/p>\n Before the sale was completed, a third-party company, Wilshire Technology Corporation (WTC), proposed a plan. The plan aimed to reduce or avoid the tax liability arising from the sale. The structure involved transferring assets into newly created subsidiaries and then selling those subsidiaries to WTC.<\/p>\n Under the arrangement:<\/p>\n
The respondents received a financial benefit, while WTC retained a larger share and moved funds offshore. The tax liability was never paid.<\/p>\n The CRA issued\u00a0reassessments\u00a0against the taxpayers under section 160(1) of the\u00a0Income Tax Act, making them liable for the subsidiaries\u2019 unpaid tax debts.<\/p>\n At the\u00a0Tax Court of Canada, the taxpayers challenged the CRA reassessments and were successful. The Tax Court judge found that there had been a transfer of property, structured as a two-step movement of cash through a third party (WTC).<\/p>\n The Tax Court concluded that the taxpayers were dealing at arm\u2019s length with WTC at the time of the transfer, as each party acted in pursuit of its own independent economic interests.<\/p>\n As a result, the requirements of section 160 were not met, and the provision could not apply.<\/p>\n The Tax Court also proceeded to consider the\u00a0General Anti-Avoidance Rule\u00a0(GAAR) on an alternative basis. It rejected the application of GAAR, finding that the CRA had not established a relevant tax benefit, an avoidance transaction, or abusive tax avoidance.<\/p>\n The Tax Court therefore allowed the taxpayers\u2019 appeals and vacated the CRA\u2019s reassessments in their entirety.<\/p>\n Issues Before the Federal Court of Appeal in\u00a0Canada v. Microbjo Properties Inc.<\/p>\n The FCA had to determine three key issues:<\/p>\n
The FCA overturned part of the Tax Court\u2019s decision. It found that:<\/p>\n
However, the Court rejected the CRA\u2019s attempt to recover the full unpaid tax amount through GAAR.<\/p>\n Analysis of the Federal Court of Appeal\u2019s Reasoning in\u00a0Canada v. Microbjo Properties Inc.<\/p>\n 1. Transfer of Property<\/p>\n The Federal Court of Appeal confirmed that subsection 160(1) applies broadly. A transfer does not need to be direct; it can occur through a series of steps. In this case, the Court accepted that the funds moved from the subsidiaries to WTC and then to the respondents, which constituted a transfer.<\/p>\n The respondents argued that no real transfer occurred because the cash was replaced by a receivable. The Court rejected this argument, finding that the supposed receivable was not genuine.<\/p>\n 2. Arm\u2019s Length Relationship<\/p>\n This was the most important issue. The Tax Court had originally found that the parties acted independently and therefore dealt at arm\u2019s length.<\/p>\n The Federal Court of Appeal disagreed. It emphasized that an arm\u2019s length relationship requires real economic tension between parties acting in separate interests.<\/p>\n Here, the Court found that:<\/p>\n
Because the parties were not using their own money and did not bear real risk, the Court concluded that true independence was lacking.<\/p>\n 3. Fair Market Value and Liability<\/p>\n Under subsection 160(1), liability is limited to the benefit received.<\/p>\n The Court accepted that the respondents gained approximately $600,000 from the transaction. Therefore, liability was limited to that amount, not the full tax debt of $1.3 million.<\/p>\n 4. The GAAR Argument<\/p>\n The CRA argued that GAAR should apply to recover the remaining unpaid tax.<\/p>\n The Court rejected this argument. It found that:<\/p>\n
Since GAAR requires proof of abusive tax avoidance, it could not be applied in this case.<\/p>\n Significance of the Case of\u00a0Canada v. Microbjo Properties Inc.<\/p>\n This decision of the Federal Court of Appeal in\u00a0Canada v. Microbjo Properties Inc.\u00a0is important for several reasons:<\/p>\n
The case also highlights the risks of participating in aggressive tax planning schemes, especially those designed by third parties.<\/p>\n Canada v. Microbjo Properties Inc.\u00a0shows how courts look beyond the surface of transactions to determine their true nature. Even though the respondents may not have fully understood the scheme, the Court still held them responsible for the benefit they received.<\/p>\n Overall, the case strikes a balance between protecting the tax system and ensuring that taxpayers are not unfairly penalized beyond their actual gain.<\/p>\n Simply dealing with an unrelated party does not mean a transaction is at arm\u2019s length. The Court in this case\u00a0made it clear that true arm\u2019s length dealings require independent interests, real negotiation, and genuine risk. If one party controls the entire structure or dictates all terms, the relationship may not be considered arm\u2019s length.<\/p>\n This can have serious tax consequences. In situations where the tax act requires an arm\u2019s length relationship, you should ensure that your transactions reflect real commercial bargaining and that both parties act independently.\u00a0<\/p>\n David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.\u00a0\u00a0<\/p>\n With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit\u00a0www.Taxpage.com\u00a0<\/a>and email David at\u00a0david@taxpage.com<\/a>.<\/p>\n Read the\u00a0original\u00a0article<\/a>\u00a0in full on Tax Law Canada. Author photo courtesy Rotfleisch & Samulovitch P.C.\u00a0The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Title image: Cayman Islands (Heidi Kiss\u00a0from\u00a0Pixabay). The FCA decision<\/a> references the Cayman Islands.<\/p>\n
\nThe subsidiaries held cash from the land sale and the related tax liability.
\nWTC agreed to purchase the shares of the subsidiaries at a price that ignored the tax liability.
\nThe parties agreed to split the amount that would otherwise have been paid as tax.
<\/p>\n
\nWhether there was a \u201ctransfer of property\u201d under section 160(1).
\nWhether the parties were dealing at arm\u2019s length.
\nWhether the General Anti-Avoidance Rule (GAAR) could apply to recover the full tax amount.
<\/p>\n
\nA transfer of property did occur.
\nThe parties were\u00a0not dealing at arm\u2019s length.
\nThe respondents were liable under section 160(1), but\u00a0only up to the benefit received.
<\/p>\n
\nThe parties were splitting money that was effectively destined for taxes.
\nThe structure was dictated entirely by WTC.
\nThe respondents followed the plan without questioning it.
<\/p>\n
\nThe respondents believed the tax plan would work.
\nThere was no clear intention to abuse the law.
<\/p>\n
\nIt reinforces that subsection 160(1) is a powerful tool for tax collection.
\nIt clarifies that \u201carm\u2019s length\u201d is not just about formal independence, but also about real economic behaviour.
\nIt confirms that liability under section 160(1) is limited to the actual benefit received.
<\/p>\n![\"Canadian](\"https:\/\/www.europesays.com\/canada\/wp-content\/uploads\/2026\/04\/Logo-Small-BW.jpg\"){kind=logo}
<\/p>\n","protected":false},"excerpt":{"rendered":"Introduction \u2013 When Tax Planning Crosses the Line: Lessons from Microbjo Properties The case of\u00a0Canada v. Microbjo Properties…\n","protected":false},"author":2,"featured_media":39892,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[17,17379,187,17383,188,17376,17381,17377,17386,17375,17382,17378,17387,17380,17384,17385],"class_list":["post-39891","post","type-post","status-publish","format-standard","has-post-thumbnail","category-canada","tag-canada","tag-canadian-tax-law","tag-cra","tag-farmland","tag-income-tax-act","tag-microbjo-properties","tag-section-1601","tag-tax-avoidance","tag-tax-court-of-canada","tag-tax-planning","tag-taxpayer","tag-third-party-liability","tag-two-step-movement","tag-unpaid-tax-debts","tag-wilshire-technology-corporation","tag-wtc"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/posts\/39891","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/comments?post=39891"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/posts\/39891\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/media\/39892"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/media?parent=39891"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/categories?post=39891"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/canada\/wp-json\/wp\/v2\/tags?post=39891"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}