27 October 2009 Internal T.I. 2009-0331681I7 - Interest on Redirected Garnishment Payment

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 interest should be paid on a garnishment amount redirected to a trustee in bankruptcy.

Position: No.

Reasons: Subsection 164(7) defines an overpayment as the excess of tax paid over tax payable. An amount paid by garnishment arises from a shortfall of tax payable over tax paid.

										October 27, 2009

	Individual Returns and Payments Directorate		HEADQUARTERS
	Processing Division						Income Tax Rulings
	Attention: Tanya Desjardins, Manager 	   		Directorate
	                  T1/T3 Accounting Enquiries and 	Lindsay Frank
                                   Refund Set-Off Section	(613) 948-2227

										2009-033168

Exigibility of Interest on Redirected Garnishment Payment

This is in reply to an email from Valorie Bunce. At issue is whether interest should be paid on a garnishment amount redirected to a trustee in bankruptcy ("trustee").

The Minister may enforce collection of a debt by issuing a Requirement to Pay to a third party, pursuant to subsections 224(1) & (1.1) of the Income Tax Act ("the Act"). The purpose of the Requirement to Pay is to intercept an amount owing by a third party to a tax debtor, and apply that amount to the tax debtor's liability. The third party is obliged to remit that amount, in the absence of which, liability would ensue pursuant to subsections 224(4) & (4.1).

Under subsection 70(1) of the Bankruptcy and Insolvency Act, the rights of a trustee take priority over the obligation of a third party to remit an amount as required on the receipt of a Requirement to Pay. An exception exists where the amount remitted in compliance with the Requirement to Pay has been cashed before the tax debtor was adjudged bankrupt. However, where the tax debtor becomes bankrupt before the remittance is cashed, the Minister is required to redirect the payment to the trustee. The Canada Revenue Agency has historically treated such redirected amounts as overpayments, and credited the amounts with interest before redirecting them to the trustee.

Subsection 164(7) of the Act defines an overpayment of taxes as the excess of tax paid over tax payable. When an overpayment arises, interest is payable on that amount in accordance with subsection 164(3). Conversely, an underpayment of tax arises where there is a shortfall of tax payable over tax paid. Unwillingness to pay that shortfall prompts the Minister to enforce collection by issuing a Requirement to Pay. Given the definition of "overpayment", subsection 164(3) does not provide for the payment of interest, when the Minister is required to redirect an amount received from the issuance of a Requirement to Pay.

While not discussed above, it should be noted that where a Requirement to Pay is issued under subsection 224(1.2) of the Act on account of source deduction arrears, and the remittance thereunder is made subsequent to the tax debtor being adjudged bankrupt, the rule discussed above does not apply, and the Crown is entitled to retain the payment. Likewise, that rule does not apply where the Requirement to Pay was issued pursuant to subsection 317(3) of the Excise Tax Act on account of GST arrears.

Should you need clarification or additional information, please do not hesitate to call Lindsay Frank at the number provided above.

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

c.c. Valorie Bunce

T1/T3 Accounting Enquiries and Refund Set-Off Section
Processing Division
Individual Returns and Payments Processing Directorate