20 October 2004 Internal T.I. 2004-0081811I7 - Effect of bankruptcy on CNIL

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 an individual's bankruptcy affects the computation of his/her CNIL balance for purposes of the capital gains exemption under s.110.6 of the Act.

Position: No.

Reasons: Upon bankruptcy, the trustee in bankruptcy is deemed to be the bankrupt individual's agent for purposes of the Act and the individual's property is deemed not to pass to or vest in the trustee but to remain vested in the individual. Nothing in the Act requires an individual's CNIL balance to be reduced to nil or otherwise affected by the individual's bankruptcy.

 		October 20, 2004

	Pat Chandrashekar	HEADQUARTERS
	Verification and Enforcement	P. Massicotte, CA, M.Fisc.
	Hamilton Tax Services Office	(613) 590-1116

		2004-008181

Bankruptcy and Cumulative Net Investment Loss ("CNIL")

This is in response to your enquiry of June 17, 2004, in which you request our comments in connection with the effect of a bankruptcy on the calculation of an individual's CNIL balance, as defined in subsection 110.6(1) of the Income Tax Act (the "Act"), for taxation years ending after the date of bankruptcy. More specifically, you ask whether an individual's CNIL balance would be reduced to nil upon bankruptcy.

Our Comments

Subsection 110.6(1) of the Act provides that an individual's CNIL at the end of a taxation year is the amount, if any, by which the total of the individual's "investment expense" for the year and any preceding taxation year ending after 1987 exceeds the total of the individual's "investment income" for the year and any preceding taxation year ending after 1987. An individual's "investment expense" for a taxation year is defined in subsection 110.6(1) of the Act and includes specific amounts deducted by the individual in computing income or taxable income for the year. Similarly, an individual's "investment income" for a taxation year is defined in subsection 110.6(1) of the Act and represents the total of specific amounts included in computing the individual's income for the year. An individual's CNIL balance at the end of a taxation year reduces that individual's "cumulative gains limit" for the year and may reduce the ability to claim a deduction under subsection 110.6(2) or (2.1) of the Act in respect of capital gains realised on the disposition of "qualified farm property" or "qualified small business corporation shares", respectively. Nothing in section 110.6 of the Act provides that an individual's CNIL balance will be affected by the individual's bankruptcy and, in particular, nothing provides that an individual's CNIL balance should be reduced to nil in such circumstances.

Where an individual becomes a bankrupt, subsections 71(2) and 67(1) of the Bankruptcy and Insolvency Act (the "BIA") provide that upon the receiving order being made or the assignment being filed with an official receiver, the bankrupt ceases to have any capacity to dispose of or otherwise deal with his/her property, and such property, subject to the provisions of the BIA and rights of secured creditors, passes to and vests in the trustee named in the receiving order or assignment for the benefit the bankrupt's creditors (except excluded property). However, for income tax purposes, specific rules apply to a bankrupt individual pursuant to subsection 128(2) of the Act. In particular, paragraph 128(2)(a) of the Act provides that the trustee in bankruptcy is deemed to be the agent of the bankrupt for all purposes of the Act. Moreover, pursuant to paragraph 128(2)(c) of the Act, the income and taxable income of a bankrupt individual shall be calculated as if the property of the bankrupt did not pass to and vest in the trustee in bankruptcy on the receiving order being made or the assignment filed but remained vested in the bankrupt, notwithstanding the provisions of the BIA. Any dealing in the estate of the bankrupt must be considered as if it was done by the trustee as agent on behalf of the bankrupt and any income from such dealing must be considered income of the bankrupt and not of the trustee.

Although paragraphs 128(2)(f) and (g) of the Act restrict the ability of the bankrupt individual to carry forward certain deductions and tax credits, nothing in section 128 of the Act provides for any particular rule to apply in relation to the computation of an individual's CNIL balance upon or after the individual's bankruptcy. As a result, it is our opinion that the computation of an individual's CNIL balance, as provided in subsection 110.6(1) of the Act, would not be affected by his/her bankruptcy.

We trust you will find the above to be of assistance. If you have any questions regarding the above, please do not hesitate to contact us.

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate