Shifting income? You still might pay the tax

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Some things just seem a little backward. Take my cousin Julia’s situation for example. Julia is an environmentalist – a self-proclaimed “tree-hugger,” to use her words. Her husband is a competitive swimmer. She doesn’t shave her legs, but he shaves his. It just seems backward to me.

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The folks at the Canada Revenue Agency (CRA) often take offence to things when they’re backward. No, I’m not talking about personal grooming habits – CRA doesn’t care much about whether or not you shave your legs. But CRA does care when someone else pays a tax bill and it should be you paying the tax instead.

The rules

Let me tell you about subsection 56(2) of our tax law, which can cause real problems in certain situations. Specifically, this subsection will cause certain amounts to be taxed in your hands even when the amounts were received by someone else. Subsection 56(2) applies when the following conditions are met:

1. There is a payment or a transfer of property to a person other than you.

2. This payment is made at your direction, or with your concurrence.

3. There is a benefit to you, or a benefit you wish to confer on the other person.

4. You would have been taxable on the amount had you received the payment or transfer of property.

In situations where these conditions are met, subsection 56(2) will cause the amount to be taxed in your hands rather than the hands of the other person who received the amount. If subsection 56(2) applies, the amount in question will need to be added to your income; CRA will however reduce the income of the person who initially received the amount, in order to prevent double taxation.

The examples

Clear as mud so far? Let me share a few examples where 56(2) might apply.