What is section 68 all about?
Section 68 gives the CRA the power to determine the reasonable consideration for the disposition of a particular property despite the allocation by the parties when allocations are suspicious. The section is most often used by the CRA to uncover any suspicious activity behind unexplained cash credits transferred by third parties who are interested in evading taxes.
What is considered suspicious activity for the CRA to use s.68?
Section 68 may apply in the following circumstances:
- the allocation of the purchase price is not reasonable in the circumstances; and
- there is no evidence of hard bargaining between the purchaser and the vendor about the allocation
What is the tax rate that the CRA applies under s.68?
Unexplained cash credits that are suspicious are taxed at a flat rate of 60% in addition to a surcharge of 25% and a penalty of 6%. The final tax rate comes to 83.25%. No deduction or allowance is allowed and no loss can be set off against such unexplained cash credit which is considered income.
How can a vendor ensure that the CRA doesn’t invoke s.68?
The purchaser and vendor should agree on allocations and file their tax returns consistently. Consistency is the hallmark of hard bargaining and consensus on allocation.
Therefore, ensure that regardless of the tax result to the vendor or purchaser, bona fide negotiations in respect of allocation occur. These can easily be documented with solicitor emails.