19 May 2010 Internal T.I. 2009-0316521I7 - Realising Deemed Security Interest Post-Bankruptcy

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a post-bankruptcy refund of a bankrupt could be applied as set off against the deemed security interest.

Position: No.

Reasons: For set-off to be effective, the asset must exist before the date of bankruptcy.

									May 19, 2010

	Winnipeg Tax Services Office				HEADQUARTERS
									Income Tax Rulings
	Attention: Deb Bassham, Assistant Director	  Directorate
	                 Taxpayer Services and  		Lindsay Frank
	                 Debt Management Division		(613) 948- 2227

									2009-031652

Realising the Deemed Security Interest Post Bankruptcy

This is in reply to an email from Gil Desroches. At issue is whether the deemed security interest could be realised by set off with a post-bankruptcy refund.

Subsection 223(11.1) of the Income Tax Act establishes a deemed security interest based on a charge created under subsection 223(6) where that charge has been registered in accordance with subsection 87(1) of the Bankruptcy and Insolvency Act ("BIA"), see M.N.R. v. Keith G. Collins Ltd., [2008] 5 C.T.C. 193 (Man. C.A.), aff'g [2008] 3 C.T.C. 273 (Man. Q.B.). The registration needs to be made pursuant to the prescribed system of registration as stipulated in section 111 of the Bankruptcy and Insolvency General Rules, C.R.C., c. 368.

Subsection 69.3(2) of the BIA provides that the bankruptcy of a tax debtor, whose property is subject to a deemed security interest, does not prevent the Crown from realising or otherwise dealing with its security. However, that security interest has to be realised from assets that the tax debtor owned prior to becoming bankrupt. Given that a post-bankruptcy refund is an asset acquired after the date of bankruptcy, the Crown is unable to realise its deemed security by set off against a post-bankruptcy refund.

Should you have any questions or require additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the telephone number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Deborah Pastuch
Revenue Collections Division
Winnipeg Tax Services Office