19 December 2008 Internal T.I. 2008-0300301I7 - Taxation and Bankruptcy

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 the calendar year in a person becomes bankrupt contains two taxation years.

Position: Yes.

Reasons: S. 128(1)(d) and (2)(d) provide that the current taxation year ends on the day before bankruptcy, while the new one begins on the day of bankruptcy.

									December 19, 2008

	Accounts Receivable Tax Programs Division		HEADQUARTERS
									Income Tax Rulings
									Insolvency and
	Attention: Art Weston	   				International Section
									Lindsay Frank

									2008-030030

The Number of Taxation Years in the Calendar Year of a Bankruptcy

This is in reply to your email in which you are seeking clarification on the interpretation of section 128 of the Income Tax Act ("the Act"), particularly paragraph128(1)(d). We agree with your view that paragraph 128(1)(d) provides a bankrupt corporation with two taxation years in the year of bankruptcy. Accordingly, the Agency's assessing system should be programmed to enable the processing of returns in respect of such years.

Section 128 of the Act contains special rules regarding the bankruptcy of a taxpayer. Subsection 128(1) relates to a corporation, while subsection 128(2) relates to an individual. Paragraphs 128(1)(d) and (2)(d) stipulate that the year of bankruptcy contains two taxation years, deeming that the current taxation year ends on the day before bankruptcy, and a new one begins on the day of bankruptcy. Parenthetically, these are referred to as the pre-bankruptcy year, which starts on January 1 and ends on the day before bankruptcy, and the post-bankruptcy year, which starts on the day of bankruptcy, and ends on December 31.

Your attention is drawn to Stiliadis v. M.N.R. (99 D.T.C. 341 (T.C.C.)), for a determination of the operation of paragraphs 128(1)(d) and (2)(d). In that case, the taxpayer was adjudged bankrupt on April 14, 1993. On January 26, 1995, the Minister assessed the bankrupt pursuant to subsection 152(7) of the Act, in light of his failure to file the return for 1993. Included in the bankrupt's taxable income was all the income earned in the calendar year.

The taxpayer appealed to the Tax Court of Canada where the appeal was allowed. The Court found that a provable claim existed from January 1, 1993, to April 13, 1993 (the pre-bankruptcy year), and that any tax payable after that period (the post-bankruptcy year) did not constitute a provable claim. Although the legal principle developed in this case concerned paragraph 128(2)(d) of the Act, it is our view that it applies equally to paragraph 128(1)(d), as the wording in the latter provision is analogous to the wording in the former.

In light of the foregoing, the systems change you are contemplating is appropriate.

Trusting you find this satisfactory,

B. J. Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate