7 January 2009 Internal T.I. 2008-0304901I7 - Taxation & Insolvency

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 all post-bankruptcy refunds vest automatically in a trustee in bankruptcy.

Position: No; only the post-bankruptcy refund associated with the calendar year of the bankruptcy vests automatically in a trustee in bankruptcy.

Reasons: Paragraph 67(1)(c) of the Bankruptcy and Insolvency Act states that the income tax refund arising from the return for the calendar year of the bankruptcy vests in a trustee in bankruptcy.

									January 7, 2009

	Individual Returns and Payment			HEADQUARTERS
	   Processing Directorate				Income Tax Rulings
	Strategic Planning and Corporate	   		Directorate
	Integration Division					Lindsay Frank
	Attention: Sheila Barnard				948-2227

									2008-030490

S. 164(1) Income Tax Act v. S. 67(1)(c) Bankruptcy and Insolvency Act

We are replying to an email from your Dianne Waterfield, who is seeking confirmation of her interpretation of the interplay between the Income Tax Act ("the Act") and the Bankruptcy and Insolvency Act ("the BIA"), where the disposition of a tax refund is the issue.

An examination of the legislation follows. Subsection 164(1) of the Act permits the Minister to refund an overpayment of tax paid in a particular year, provided that, among others, the taxpayer has filed the return for that particular year within 3 years from the end of the year. Paragraph 67(1)(c ) of the BIA, as amended by Bill C-12, treats a post-bankruptcy refund as property that vests in a trustee in bankruptcy ("trustee"). However, notwithstanding the treatment of this refund, should the bankrupt taxpayer be subject to a garnishment order under the Family Orders and Agreements Enforcement Assistance Act, that order continues to be enforceable against it.

Ms. Waterfield's understanding of the interplay between subsection 164(1) of the Act and paragraph 67(1)(c) of the BIA is that the tax refund for the pre-bankruptcy period and the post-bankruptcy period, for the calendar year of the bankruptcy, forms part of the bankrupt taxpayer's property, and should be remitted to the trustee. Further, an income tax refund, acquired by the taxpayer after receiving an absolute discharge from bankruptcy, does not form part of the bankrupt taxpayer's property, and should be remitted to the taxpayer. However, trustees are of the view that all post-bankruptcy refunds form part of the bankrupt taxpayer's property, and, accordingly, should be remitted to the estate.

We share Ms. Waterfield's view that the tax refund for the pre-bankruptcy period and the post-bankruptcy period, for the calendar year of the bankruptcy, forms part of the bankrupt taxpayer's property, and vests automatically in the trustee. Further, in the absence of a court order to the contrary, we agree that, once the taxpayer has been discharged from bankruptcy, the tax refund for any year beyond the calendar year of the bankruptcy is not available to the trustee. In short, it is our view that a post-bankruptcy refund, other than that pertaining to the calendar year, does not vest automatically in the trustee.

The case law has established rules regarding the disposition of a tax refund belonging to a bankrupt. A tax refund for a pre-bankruptcy period is divisible among the creditors of the estate: Wagner v. Diegel & Feick Inc. (1980), 35 C.B.R. (N.S.) 309 (Ont. S.C.); Re Sihler (1982), 43 C.B.R. (N.S.) 49 (Ont. S.C.); Re Sandulak (1998), 8 C.B.R. (4th) 87 (Man. Q.B.). On the other hand, a tax refund for a post-bankruptcy period is not so divisible: Marzetti v. Marzetti, 26 C.B.R. (3d) 161 (S.C.C.). The amendment to paragraph 67(1)(c) of the BIA, however, serves to limit the application of the latter principle.

It is clear from a reading of paragraph 67(1)(c) of the BIA that "any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year ... in which the bankrupt became bankrupt" can only mean that refund for the year in which the taxpayer was adjudged bankrupt; it cannot mean all subsequent post-bankruptcy refunds. A trustee, requiring access to further post-bankruptcy refunds, would have to make application pursuant to section 68 of the BIA.

Trusting you find this satisfactory,

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

c.c. Dianne Waterfield