1 November 2004 External T.I. 2004-0083561E5 - Bankruptcy-Ontario Tax Reduction

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 bankrupt individual is entitled to claim an Ontario Tax Reduction in the calendar year of bankruptcy.

Position: Yes, but only on the "post-bankruptcy return".

Reasons: Ss.7(4) of the OITA provides that the OTR cannot be claimed in respect of a taxation year that does not include the 31st day of December. Ss. 7(6) of the OITA provides that a claim for an OTR cannot be made in respect of a tax return filed on behalf of a bankrupt individual by a trustee in bankruptcy pursuant to par. 128(2)(e) of the Federal Act.

XXXXXXXXXX 2004-008356

P. Massicotte, CA, M.Fisc.

November 1, 2004

Dear XXXXXXXXXX:

Re: Bankruptcy and Ontario Tax Reduction ("OTR")

We are writing in reply to your enquiry of June 28, 2004, requesting our comments in connection with the effect of a bankruptcy on the calculation of an individual's OTR. More specifically, you ask for our views in connection with an individual's entitlement to the OTR in the calendar year during which the individual becomes a bankrupt.

Our Comments

Where an individual becomes bankrupt during a calendar year, subsection 128(2) of the Income Tax Act of Canada (the "Federal Act") provides inter alia that the trustee in bankruptcy is deemed to be the agent of the bankrupt and the income, and taxable income, of the individual for any taxation year during which he or she was a bankrupt must be calculated as if the property of the bankrupt did not pass to and vest in the trustee in bankruptcy but remained vested in the bankrupt. Under paragraph 128(2)(e) of the Federal Act, the trustee must file a return of income on behalf of the individual in relation to any dealings in the estate of the bankrupt or acts performed in the carrying on of the business of the bankrupt by the trustee.

Pursuant to paragraph 249(1)(b) of the Federal Act, an individual's taxation year is normally the calendar year. However, where an individual has become a bankrupt in a calendar year, paragraph 128(2)(d) of the Federal Act provides that the individual's taxation year is deemed to have ended on the day that is immediately prior to the day of bankruptcy, and deems a new taxation year to have commenced on the day of bankruptcy. Accordingly, a bankrupt individual will have two taxation years ending in the same calendar year, with the first being from January 1 until the day immediately before the individual became a bankrupt, and the second taxation year from the date of bankruptcy to December 31st of that calendar year. Subsection 150(1) of the Federal Act provides that a return of income shall be filed for each taxation year of a taxpayer.

As a result, in the calendar year in which an individual becomes bankrupt, a number of income tax returns must be filed by, or on behalf of, the individual:

? a return must be filed for the taxation year that ends on the day immediately before the bankruptcy (the "pre-bankruptcy return");

? a return must be filed under paragraph 128(2)(e) of the Federal Act by the trustee in bankruptcy with respect to certain income of the estate and business of the bankrupt for each taxation year ending in the calendar year; (the "in-bankruptcy return") and

? a separate return must be filed under paragraph 128(2)(f) of the Federal Act by the individual for each taxation year during which the individual was a bankrupt, that is, the period that begins on the day of bankruptcy and ends on December 31st for the year in which the individual became a bankrupt (the "post-bankruptcy return").

Where a bankrupt individual is subject to Ontario income tax, a tax reduction may be claimed pursuant to section 7 of the Ontario Income Tax Act (the "Ontario Act"), to the extent of the individual's "personal amount" for that year. Subsection 7(2.2) of the Ontario Act indicates that an individual's "personal amount" for a taxation year is the total of a "basic reduction" plus an "eligible amount" for each dependent minor child and for each infirm or disabled dependant (hereinafter referred to as "dependants"). However, in general terms, where an individual was cohabiting with a spouse or common-law partner on the 31st day of December, subsection 7(2.1) of the Ontario Act provides that the individual may include an amount in his or her "personal amount" for the taxation year, with respect to dependants of the individual or of the cohabiting spouse or common-law partner, only if the individual's income for the taxation year exceeds the income of the cohabiting spouse or common-law partner for the taxation year.

In the case of bankrupt individuals, subsection 7(6) of the Ontario Act provides that the OTR will not be available to an individual with respect to an income tax return filed by a trustee in bankruptcy on behalf of the individual under paragraph 128(2)(e) or (h) of the Federal Act for a taxation year. In addition, similar to several other tax credits available under the Ontario Act, the OTR will not be available to an individual for a particular taxation year if the individual is not resident in Ontario on the 31st day of December in that taxation year, pursuant to paragraph 7(4)(b) of the Ontario Act. As a result, it is our position that where an individual becomes a bankrupt during a calendar year, the OTR can only be claimed by the individual on the tax return filed for the taxation year that includes the 31st day of December, that is, the "post-bankruptcy return" filed by the individual for the year of bankruptcy. The OTR cannot be claimed when the trustee in bankruptcy files the "in-bankruptcy return" on behalf of the individual as that return is filed under paragraph 128(2)(e) of the Federal Act. In addition, the OTR will not be available to the bankrupt individual for the taxation year ending immediately before the bankruptcy, that is, when filing the "pre-bankruptcy return", as that taxation year does not include the 31st day of December.

We trust the above comments are of assistance to you.

Yours truly,

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