In the Matter of the Bankruptcy of Rockton Shayne Bernard Neufeld, [1994] 1 CTC 252

Alberstat, Master:—This is an application for advice and directions by the trustee of the estate of Rockton Shayne Bernard Neufeld.

Mr. Neufeld made an assignment into bankruptcy September 19, 1991. He received an unconditional discharge on April 21, 1992. The trustee has also received an order for discharge.

The bankrupt's child, Cody Neufeld, aged 14, is legally blind. He has very limited vision and can see no details except with the assistance of special glasses and an enlarging computer.

Specialized computer equipment is required by Cody at home to allow him to do his school work. Cody's access to similar equipment through the school system is limited because the equipment at school is shared with other students who are disabled.

After Mr. Neufeld was discharged from bankruptcy he was advised to apply for a disability tax credit and deductions for his infant son Cody, for the current year and for previous taxation years. He filed returns for the years 1985 through 1991 with Revenue Canada. He was refunded $6,154.12. The money was paid to the trustee pursuant to an assignment. The trustee now applies for advice and directions as to the disposition of these funds.

Subsection 71(2) of the Bankruptcy Act, R.S.C. 1985, c. B-3 [now Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3] provides that tax refunds for taxation years prior to the date of bankruptcy are the property of the bankrupt, vesting in the trustee and are available for disposition to creditors.

Anyone applying for a disability tax credit requires a certificate from a qualified medical practitioner. The certificate sets out that the disabled person has a prolonged impairment and is “markedly restricted" in his "activities of daily living".

The special exemption for visually-impaired persons was changed to a tax credit in 1988. There is a prescribed formula to follow to arrive at the tax credit allowed.

Any amount of the tax credit not used by an individual entitled to the tax credit may be transferred to a parent or a spouse.

Unlike other tax credits the disability tax credit is not dependent upon receipts.

If a disabled child has no income and is residing with a parent who is wholly supporting that child, the whole of the tax credit may be used by the parent.

The special exemptions previously given to disabled people who were blind or wheelchair bound was replaced by a general disability exemption. The exemption was converted to a tax credit in 1988.

This tax credit is personal to the person disabled. It lives and dies with that disabled person. The clear policy reason allowing the transfer of unused amounts of the disability tax credit to a parent or spouse wholly or partially supporting that disabled person is to supply financial relief for the support and maintenance of that disabled person.

The tax credit was never intended for the use of creditors of the supporting parent or spouse.

It would be unfair and inequitable for creditors to benefit financially from the disability of a child or spouse of a bankrupt. It is a personal tax credit, personal to the disabled person, for the support and maintenance of that disabled person. It is quite independent of the supporting parent or spouse's income or liabilities or obligations. It is not the parent's tax credit but the child’s tax credit, albeit it may be used by the supporting parent or spouse.

It would be against public policy for creditors of Cody's parents to be able to take advantage of the refund directly from Cody if he had an income. The tax credit belongs to the dependent child, Cody, not the parent. If the creditors were to be able to claim the tax refund from the parents’ estate, they the creditors would be benefiting indirectly from that which they could not do directly.

It is settled law that some rights such as personal injury damage claims do not vest in the trustee.

In Re Hollister, [1926] 3 D.L.R. 707, 7 C.B.R. 629 (Ont. S.C.), per Fisher, J. at pages 708-09 (C.B.R. 630-31):

The law is well settled that the Bankrupcty Act, S.C. 1991, c. 36, never intended to increase the assets of an insolvent for division amongst his creditors, of moneys recovered in an action for personal injuries, as these moneys are awarded as damages to the debtor for his pain, suffering and loss of comfort of life, to pay his physician, nurses and hospital expenses, and to compensate him whilst he is incapacitated from earning a living for himself and his family. . . . Causes of action arising from bodily or mental suffering, such as actions for assault, seduction, criminal conversation, and damages for personal injuries, remain in the bankrupt.

In Ritenburg v. Crown Trust Co. (1961), 3 C.B.R. (N.S.) 294, 33 D.L.R. (2d) 498 (Alta. T.D.), per Riley, J. at page 298 (D.L.R. 501) [quoting McBride, J. in Eggen (Egan) v. Grayson (1956), 36 C.B.R. 72, 8 D.L.R. (2d) 125 (Alta. S.C.), at page 75 (D.L.R. 127), in turn quoting Rugg, J. in Sibley v. Mason (1907), 196 Mass. 125 at page 130]:

It is not and never has been the policy of the law to coin into money for the profit of his creditors, the bodily pain, mental anguish or outraged feelings of a bankrupt. None of the Federal or English Bankruptcy Acts nor our own insolvency statutes have gone to that length.

The disability tax credit is personal to Cody. It is as personal as if he were receiving an award for pain and suffering arising from injuries sustained by reason of another person's negligence. The tax credit exists because of Cody and will die with Cody. The fact that any unused portion of this tax credit may be used by a wholly-supporting parent or a spouse to obtain funds for the support of this disabled person does not alter the fact that the refund is personal to Cody, the dependent person.

The tax credit is no less personal to Cody even though received by his parent.

Generally tax refunds held by the trustee for refunds for taxation years prior to the bankruptcy are the property of the bankrupt and therefore available for the distribution to the creditors of the bankrupt.

Notwithstanding this, tax refunds received by a bankrupt in taxation years prior to or during a bankruptcy on behalf of a disabled person who is being supported partially or wholly are not the property of the bankrupt. They do not vest in the trustee and are not available for distribution to the creditors of the bankrupt. Disability tax refunds are the property of the disabled person although claimed by the parent for the benefit of the disabled person.

Although a constructive trust of the refund money was not addressed, it seems to me that such an argument might also apply.

Order accordingly.