REASONS FOR JUDGMENT
D’Auray J.
INTRODUCTION
[1]
This is an appeal pursuant to the informal
procedure from a reassessment made on October 31, 2011, by the Minister of
National Revenue (the Minister) for the 2010 taxation year, according to which
he added to the appellant’s income an amount of $39,335 as income from a Registered
Retirement Savings Plan.
FACTS
[2]
The appellant was holding a sum of money in a Registered
Retirement Savings Plan (RRSP) with Compagnie de Fiducie du Groupe Investors
Ltée (the Trust Company).
[3]
On May 15, 2008, the Canada Revenue Agency (the CRA)
filed a certificate of indebtedness with the Federal Court under section 223 of
the Income Tax Act (the Act). At the time, the appellant had a tax debt
of $321,793.78.
[4]
On June 3, 2008, the CRA registered a notice of legal
hypothec in respect of the appellant’s RRSP. The hypothec was entered in the
register of personal and movable real rights.
[5]
On December 5, 2008, the appellant declared
bankruptcy.
[6]
The CRA chose to not submit a proof of claim to
the trustee to participate in the division of assets of the bankruptcy as an
ordinary creditor for the unsecured portion of its debt.
[7]
On December 10, 2009, a bankruptcy discharge
order was issued in respect of the appellant by the Supreme Court of British
Columbia.
[8]
On January 19, 2010, an interim garnishment order
was issued in favour of the Minister. That order provided that any amount owing
or that would become owing by the Trust Company to the appellant, and more
specifically the amounts invested in the RRSP held by the Trust Company in the
name of and on behalf of the appellant, be seized in response to the certificate
filed on May 15, 2008, in the Federal Court.
[9]
On February 26, 2010, the CRA obtained a final garnishment
order. By virtue of that order, the Minister garnished the RRSP that was
covered by the legal hypothec to satisfy a portion of the amount remaining owing
under the certificate filed on May 15, 2008.
[10]
On May 7, 2010, the trustee was discharged.
[11]
On October 31, 2011, the Minister issued a
reassessment for the 2010 taxation year in which he added in computing the
appellant’s income an amount of $39,335 as RRSP income.
[12]
The Minister considered the RRSP amount he had seized
to be taxable income for the appellant’s 2010 taxation year. The Minister
therefore included that amount in the appellant’s income, which the appellant
objects to.
Issue
[13]
The issue is whether the Minister correctly
added the amount of $39,335 from the RRSP in computing the appellant’s income
for the 2010 taxation year.
[14]
The appellant claims that the Minister was not
entitled to include the amount of $39,335 in computing her income for the 2010
taxation year.
[15]
The appellant argues that the Minister’s secured
debt was part of the provable claims because all the creditors had a provable
claim in the bankruptcy. Consequently, she contends that all debts, including
debts to secured creditors, were extinguished by the bankrupt’s order of discharge.
As a result, the appellant was released from all of her tax debt, whether it
was secured or not. In support of her position that the Minister’s debt is extinguished,
the appellant relies on Beaudoin v The Queen, 2004 TCC 152, rendered by
Justice Angers of this Court.
[16]
At the hearing, the appellant argued that the
Minister’s security survived the bankruptcy, but that the tax debt was
extinguished. The appellant claims that secured creditors simply have an
additional tool that gives them an advantage over other creditors.
[17]
The appellant also submits that she was divested
of her RRSP at the time of her bankruptcy.
[18]
According to the respondent, the appellant
received an amount of $39,335 as RRSP income, thus triggering the inclusion of
that amount in her income for the 2010 taxation year in accordance with
paragraph 56(1)(h) and subsection 146(8) of the Act.
[19]
The respondent maintains that the bankruptcy
released the bankrupt from her provable claims. In the respondent’s view, the
secured debt does not constitute a provable claim under the Bankruptcy and
Insolvency Act, RSC 1985, c B-3 (the BIA). She argues that the debt
remained after the bankruptcy to the extent of the security. In support of her position,
counsel for the respondent referred to, in particular, the judgment of the
Superior Court of Québec in Gagnon c Fiducie Desjardins, [1992] RJQ 2244
(approved by the Court of Appeal of Québec, [1993] JQ No 1645).
[20]
The respondent argued that the RRSP was not
included in the appellant’s bankruptcy assets. The respondent submits that the BIA
was amended so that RRSPs are not included in a trustee’s seisin. Thus, when
the RRSP amount was withdrawn from the appellant’s account by reason of the
seizure to pay a portion of the debt owing to the Minister, the appellant had
to include that amount in computing her income. The respondent claims that it
is as if the appellant had withdrawn her RRSP to send it to the Minister as payment
of her debt.
[21]
The BIA creates a particular legislative
framework. In bankruptcy, the status of the creditor is very important because
the situation of a secured creditor is different from that of an unsecured
creditor.
[22]
The following provisions of the BIA are relevant
in this case:
Definitions
2. In this Act,
“creditor” means
a person having a claim provable as a claim under this Act;
“secured
creditor” means a person holding a mortgage, hypothec, pledge, charge or lien
on or against the property of the debtor or any part of that property as
security for a debt due or accruing due to the person from the debtor, or a
person whose claim is based on, or secured by, a negotiable instrument held as
collateral security and on which the debtor is only indirectly or secondarily
liable, and includes:
. . .
“claim provable in bankruptcy”, “provable
claim” or “claim provable” includes any claim or liability provable in
proceedings under this Act by a creditor;
Property of the bankrupt
67 (1) The
property of a bankrupt divisible among his creditors shall not comprise
(b.3) without
restricting the generality of paragraph (b), property in a registered
retirement savings plan or a registered retirement income fund, as those
expressions are defined in the Income Tax Act, or in any prescribed
plan, other than property contributed to any such plan or fund in the 12 months
before the date of bankruptcy,
. . .
Claims provable
121. (1) All debts and liabilities, present or future, to
which the bankrupt is subject on the day on which the bankrupt becomes bankrupt
or to which the bankrupt may become subject before the bankrupt’s discharge by
reason of any obligation incurred before the day on which the bankrupt becomes
bankrupt shall be deemed to be claims provable in proceedings under this Act.
. . .
Creditors shall
prove claims
124. (1) Every creditor shall prove his claim, and a creditor
who does not prove his claim is not entitled to share in any distribution that
may be made.
Proof by
delivery
(2) A claim
shall be proved by delivering to the trustee a proof of claim in the prescribed
form.
Who may make
proof of claims
(3) The
proof of claim may be made by the creditor himself or by a person authorized by
him on behalf of the creditor, and, if made by a person so authorized, it shall
state his authority and means of knowledge.
Proof by secured creditor
127. (1) Where a secured creditor
realizes his security, he may prove the balance due to him after deducting the
net amount realized.
May prove whole
claim on surrender
(2) Where a
secured creditor surrenders his security to the trustee for the general benefit
of the creditors, he may prove his whole claim.
Debts not
released by order of discharge
178. (1) An order of discharge does not release the bankrupt
from
(a) any fine, penalty,
restitution order or other order similar in nature to a fine, penalty or
restitution order, imposed by a court in respect of an offence, or any debt
arising out of a recognizance or bail;
(a.1) any award of damages by
a court in civil proceedings in respect of
(i) bodily harm intentionally
inflicted, or sexual assault, or
(ii) wrongful death resulting
therefrom;
(b) any debt or liability for
alimony or alimentary pension;
(c) any debt or liability
arising under a judicial decision establishing affiliation or respecting
support or maintenance, or under an agreement for maintenance and support of a
spouse, former spouse, former common-law partner or child living apart from the
bankrupt;
(d) any debt or liability
arising out of fraud, embezzlement, misappropriation or defalcation while
acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or
administrator of the property of others;
(e) any debt or liability
resulting from obtaining property or services by false pretences or fraudulent
misrepresentation, other than a debt or liability that arises from an equity
claim;
(f) liability for the dividend
that a creditor would have been entitled to receive on any provable claim not
disclosed to the trustee, unless the creditor had notice or knowledge of the
bankruptcy and failed to take reasonable action to prove his claim;
(g) any debt or obligation in
respect of a loan made under the Canada Student Loans Act, the Canada
Student Financial Assistance Act or any enactment of a province that
provides for loans or guarantees of loans to students where the date of
bankruptcy of the bankrupt occurred
(i) before the date on which the bankrupt
ceased to be a full- or part‑time student, as the case may be, under the
applicable Act or enactment, or
(ii) within seven years after the date on
which the bankrupt ceased to be a full- or part-time student;
(g.1) any debt or obligation
in respect of a loan made under the Apprentice Loans Act where the date
of bankruptcy of the bankrupt occurred
(i) before the date on which the bankrupt
ceased, under that Act, to be an eligible apprentice within the meaning of that
Act, or
(ii) within seven years after the date on
which the bankrupt ceased to be an eligible apprentice; or
(h) any debt for interest owed
in relation to an amount referred to in any of paragraphs (a) to (g.1).
Claims released
(2) Subject to subsection (1), an order of discharge releases
the bankrupt from all claims provable in bankruptcy.
[23]
In my opinion, it is apparent from the
definitions of the terms “creditor” and “secured creditor” and from section 121
of the BIA that a secured debt does not constitute a provable claim under the
BIA.
[24]
As several authors have pointed out, secured
creditors are strangers to bankruptcy.
[25]
In certain situations, a secured creditor may,
however, wish to participate in the bankruptcy process. Secured debts are included
as part of provable claims only in the following circumstances:
-
Where a secured creditor realizes his security,
he may prove the balance due to him after deducting the net amount realized (subsection
127(1) BIA);
-
Where a secured creditor surrenders his security
to the trustee for the general benefit of the creditors, he may prove his whole
claim (subsection 127(2) BIA);
-
Secured creditors may assess their security and
prove the unsecured portion of their debt (subsection 128(2) BIA).
[26]
By not participating in the bankruptcy, a
secured creditor will not be entitled, for the unsecured portion, to a distribution
amongst the creditors if there is one. Furthermore, secured creditors cannot
take personal action against bankrupts for the unrecovered portion of their debt
once the bankrupt is discharged.
[27]
The relevant provisions of the Act in this
appeal are paragraph 56(1)(h) and subsection 146(8).
[28]
The inclusion in income of RRSP amounts is
prescribed by paragraph 56(1)(h) of the Act, which reads as follows:
56. (1) Amounts to be included in income for
year -- Without restricting the generality of section 3, there shall be
included in computing the income of a taxpayer for a taxation year,
(h) Registered
retirement savings plan, etc.
-- amounts required by
section 146 in respect of a registered retirement savings plan or a registered
retirement income fund to be included in computing the taxpayer’s income for
the year;
[29]
Paragraph 56(1)(h) of the Act references
the relevant rules of section 146 of the Act. Subsection 146(8) of the Act
reads as follows:
(8) Benefits [and withdrawals] taxable --
There shall be included in computing a taxpayer’s income for a taxation year
the total of all amounts received by the taxpayer in the year as benefits out
of or under registered retirement savings plans, other than excluded
withdrawals (as defined in subsection 146.01(1) or 146.02(1)) of the taxpayer
and amounts that are included under paragraph (12)(b) in computing the
taxpayer’s income.
[30]
The definition of “benefit” can be found in subsection
146(1) of the Act and reads as follows:
146(1) In this section,
“benefit” includes any amount received out of or under a retirement
savings plan other than:
. . .
[31]
In order for paragraph 56(1)(h) of the
Act to apply, the appellant must have received, in the 2010 taxation year, amounts
as benefits out of or under her RRSP.
[32]
The case law is clear: the term “receive” must
be interpreted broadly. Receive obviously means to benefit or profit from (Morin
v Canada, [1974] F.C.J. No 907 (QL) (F.C.T.D.), at paragraph 23).
[33]
Furthermore, the Minister’s legal hypothec
constitutes a security under the BIA (Minister of National Revenue v Keith G
Collins Ltd, 2008 MBCA 92). The appellant has also not challenged this
point.
[34]
In this case, the evidence has established that
the Minister did not submit a proof of claim. The Minister instead chose to realize
his security outside the bankruptcy proceeding.
[35]
In Beaudoin v The Queen, supra,
Justice Angers of this Court made the following comments at paragraph 13:
[13] In the instant case, for
reasons that were not explained, the amount invested with La Laurentienne was
not assigned to the trustee of the assignment under the Bankruptcy and
Insolvency Act. It is equally clear that the amount was not directly paid
to the appellant, though the payment of the amount by La Laurentienne could be
beneficial to the appellant in the sense that it serves to pay down the
appellant's debt to the Minister, thereby constituting an “indirect receipt”
that would require the appellant to add the amount to his income for the
taxation year in issue. However, since the tax debt was cancelled by the
order discharging the appellant, one can, in my view, conclude that La
Laurentienne’s payment of RRSP income to the Minister, with a view to paying an
extinguished debt, is not an amount received by the appellant as a benefit
within the meaning of subsection 146(8) of the Act because the appellant
obtained no sum of money or advantage as a result of the payment.
[Emphasis
added.]
[36]
The facts in this case are distinguishable from the
facts in that decision. First, in Beaudoin, there was no secured debt,
because no security was taken by the Minister. Second, at the time when Beaudoin
was rendered, RRSPs constituted property that fell within a trustee’s seisin, which
is no longer the case following the legislative amendment. Subsection 67(b.3)
of the BIA, which applies in this case, excludes an RRSP from property
divisible among creditors. Subsection 67(b.3) reads as follows:
Property of the bankrupt
67 (1) The property of a bankrupt
divisible among his creditors shall not comprise
(b.3) without
restricting the generality of paragraph (b), property in a registered
retirement savings plan or a registered retirement income fund, as those
expressions are defined in the Income Tax Act, or in any prescribed
plan, other than property contributed to any such plan or fund in the 12 months
before the date of bankruptcy,
. . .
[37]
As a result, Beaudoin is of no assistance
to the appellant.
[38]
The Superior Court of Québec stated the
following in Gagnon c Fiducie Desjardins, supra:
[translation]
15 Finally,
subsection 178(2) of the Bankruptcy Act states
the following: “ . . . an order of discharge releases the bankrupt from all
claims provable in bankruptcy”. Of course, that discharge is subject to the
cases set out in subsection 1 of the same section; the English version is very
specific in that regard.
22 The
discharge ruling obtained by the applicant does not make the security held by
the respondent disappear, namely because it does not constitute a provable
claim under the Bankruptcy Act.
23 In
fact, the Court is of the opinion that the discharge ruling releases the
bankrupt from the provable claims that a secured creditor is able to produce in
the context of sections 127 and 128 of the Bankruptcy Act.
24 Furthermore,
the provisions of the Bankruptcy Act prevent secured creditors from
taking personal action against bankrupts. Creditors must pay themselves using
the security that was given to them. In other words, the obligation that
supports the security remains, but the specific provisions of the Bankruptcy
Act mean that payment can only come from realizing that security.
[Emphasis added.]
[39]
The order of discharge releases the bankrupt
from the debts that constitute provable claims, with the exception of those
listed in subsection 178(1) of the BIA.
[40]
Because secured debts do not constitute provable
claims in a bankruptcy, bankrupt debtors are not released from them.
[41]
For the secured creditor, the release of the
bankrupt signifies that no personal action is possible to collect the balance
not recovered by the realization of a security.
[42]
In this case, the Minister decided to exclude himself
from the bankruptcy proceeding and to realize his security after the appellant’s
release.
[43]
Because the secured debt of $39,335 is not a
provable claim, the appellant was not released from it.
[44]
The RRSP also remains the property of the
appellant after her release under subsection 67(b.3) of the BIA because,
as stated earlier, RRSPs do not fall within a trustee’s seizin. Consequently,
the appellant would have been taxed if she had decided to withdraw the amounts
invested in it. The tax consequence is the same whether the Minister seizes the
RRSP funds or the appellant withdraws them.
[45]
The seizure by the Minister of the RRSP held by the
Trust Company is beneficial for the appellant, in the sense that it reduces a
portion of her tax debt. It is, in my opinion, a benefit received indirectly by
the appellant under subsection 146(8) of the Act, requiring her to include
that amount in computing her income for the taxation year in dispute.
DECISION
[46]
As a result, the appeal is dismissed without
costs.
Signed at Ottawa, Canada, this 11th day
of May 2015.
“Johanne D’Auray”
Translation certified true
On this 23rd day of June, 2015
Janine Anderson, Translator
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