Stiliadis v. R., [1999] 2 CTC 2137, 99 DTC 341

Hamlyn T.C.J.:

This appeal is in respect of the Appellant’s 1993 pre and post-bankruptcy taxation years.

Facts

On October 15, 1992, the Appellant was petitioned into bankruptcy.

On April 14, 1993, a receiving order was issued against the Appellant with respect to the petition for bankruptcy made against him on October 15, 1992.

In October 1993, the Appellant’s appeal from the receiving order issued against him was dismissed.

The date of the Appellant’s bankruptcy was April 14, 1993.

During 1993, the Appellant carried on business and was self-employed.

The fiscal year end for the Appellant’s business was December 31.

During the period January 1, 1993 to March 31, 1993, the Appellant deposited into a bank account the amount of $56,647 as income from business.

During the period April 16, 1993 to August 31, 1993, the Appellant deposited into a bank account the amount of $21,854 as income from business.

During the period September 1, 1993 until December 31, 1993, the Appellant deposited into a bank account the amount of $260 as income from business.

The Appellant failed to file his return of income for his 1993 taxation year as and when required by sections 128 and 150 of the Income Tax Act (the “Act”).

The Minister of National Revenue (the “Minister”) assessed the Appellant under subsection 152(7) of the Act, notice thereof dated January 26, 1995, to include in income the amount of $80,000.

The Appellant served on the Minister a Notice of Objection to the assessment of his 1993 taxation year, which notice was dated March 20, 1995.

With his Notice of Objection, the Appellant filed an income tax return for his 1993 taxation year whereby he reported gross business income of $21,854.33 and net business income of $14,132.03 from his business as film producer.

The assessment of the Appellant’s 1993 taxation year was confirmed by the Minister, notice thereof dated January 31, 1997.

Issue

The issue to be decided is whether the Appellant is liable to pay income tax on the income earned by him from his business as film producer during the whole of the period of that business, being January 1, 1993 to December 31, 1993, or whether the Appellant is only liable to pay income tax on the income earned by him from his business as film producer earned by him during his first post-bankruptcy taxation year being the period April 15, 1993 to December 31, 1993.

The Appellant’s Argument

The liability accruing with respect to his income tax obligations as a self-employed person to the date of his bankruptcy was a claim provable in bankruptcy within subsection 121(1) of the Bankruptcy and Insolvency Act (the “Bankruptcy Act’) and as such was stayed by subsection 69(1) of the Bankruptcy Act.

The fact that the final amount of his earnings could not have been determined until the end of the 1993 calendar year did not remove his income tax liability as a self-employed person to the date of his bankruptcy from the realm of being a claim provable in bankruptcy.

His liability to pay income tax arose at the time he earned income notwithstanding that the requirement to pay to the Receiver General the amount of income tax came into existence at a later date.

Even if his income tax liability as a self-employed person to the date of his bankruptcy was not a ‘present liability’ within subsection 121(1) of the Bankruptcy Act because the final amount of his earnings could not have been determined until the end of the calendar year, it was nonetheless a ‘future liability’ within subsection 121(1) of the Bankruptcy Act and was therefore a claim provable in bankruptcy.

If subsections 69(1) and 121(1) and section 178 of the Bankruptcy Act cannot be reconciled with subsection 11(1) and paragraphs 128(2)(d) and (f) of the Act, applying the maxim generalia specialibus non derogant, the provisions of the Bankruptcy Act override and ought not to be interfered by those of the Act.

The Respondent’s Argument

Subsection 121(1) of the Bankruptcy Act defines claims provable in bankruptcy as “[a]ll 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.

As the Appellant’s taxable income from his business cannot be ascertained until the end of his fiscal period being December 31, 1993, his estimate of tax as reported on his return of income for the first post-bankruptcy taxation year (and ultimately his tax payable as fixed by assessment) also cannot be ascertained until the end of his fiscal period. As such, any tax payable by the Appellant on his taxable income from his business as a film producer is not a claim provable under the Bankruptcy Act within the meaning of that term as defined by the Bankruptcy Act.

Legislation

The purpose of the Bankruptcy Act is to permit debtors (bankrupts) to obtain a discharge from debts subject to reasonable conditions and to provide for the orderly distribution of property of a bankrupt owing creditors on a prescribed basis. [1]

The legislative purpose also ensures that all property owned by the bankrupt at the date of bankruptcy vests in the trustee for realisation by him and distribution to creditors. [2]

The legislation provides all debts and liabilities to which the bankrupt is subject at the date of bankruptcy or may be subject before discharge shall be claims provable in bankruptcy. [3]

Subsection 69(1) of the Bankruptcy Act stays all claims provable in bankruptcy upon the bankruptcy of the debtor.

Subsection 178( 1 ) of the Bankruptcy Act lists certain debts of a bankrupt not released by order of discharge. Subsection 178(2) provides, subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.

In a current year upon bankruptcy for individuals the taxation year comes to an end on the day before the bankruptcy and a new taxation year begins on the day of the bankruptcy and ends on December 31 of that year. [4]

Income tax is payable upon taxable income for each taxation year. Taxable income of a taxpayer’s income for a taxation year is the taxpayer’s income for the year computed in accordance with the Act. [5]

The taxation year for an individual is the calendar year. [6]

Where an individual is a sole proprietor of a business, the individual’s income from that business is deemed to be the individual’s income from the business for the fiscal periods of the business that ended in that year. [7]

Analysis

The liability to pay income tax arises by operation of the Act.

Taxpayers’ tax liability is determined by reference to taxpayers’ taxable income.

Income tax is payable upon taxable income for each taxation year. Income tax liability arises when the taxpayer has taxable income in a taxation year and is an ongoing liability. [8]

Where a taxpayer is a proprietor of a business, the individual’s income from the business for a taxation year is deemed to be the individual’s income from the business for the fiscal periods of the business that ended in that taxation year.

A bankrupt individual’s taxation year in a calendar year however is treated uniquely. There are two taxation years. Upon bankruptcy the current taxation year comes to an end and a new taxation year begins.

By fixing a date that defines two taxation years in the same calendar year (pre-bankruptcy and post-bankruptcy) the Act recognises the changed status of the bankrupt.

Upon bankruptcy, the bankrupt’s property vests in the trustee in bankruptcy. In reality, this in and of itself brings the actual fiscal year to an end. All debts are subject to claims provable in bankruptcy. Subsection 69(1) of the Bankruptcy Act stays all claims provable in bankruptcy.

Conclusion

I conclude income tax liability for the Appellant for the period between January I, 1993 and April 13, 1993, is a present claim provable in bankruptcy. The computation of tax payable for this Appellant after the bankruptcy does not affect the liability that arose and attaches before the bankruptcy.

Decision

The appeal is allowed and the assessment is referred back to the Minister on the basis that the combined operation of the Income Tax Act and the Bankruptcy and Insolvency Act, the Appellant’s liability to pay tax on income earned (a present claim provable in bankruptcy) between January 1, 1993 and April 13, 1993, is stayed.

The Appellant is entitled to his costs on a party and party basis.

Appeal allowed.