27 September 2011 Internal T.I. 2010-0389171I7 - Reassessment of a Bankrupt Taxpayer

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: 1. Whether the Minister could withhold a refund for a lengthy period?
2. Whether the Minister should reassess the 2007 taxation year?
3. Whether the Minister should write off the debt, given that the taxpayer is bankrupt?

Position: 1. Yes; but not in the instant case.
2. Yes.
3. No.

Reasons: 1. The Minister could exercise discretion and retain a refund for a lengthy period if the delay could be reasonably justified, based on the circumstances of the case. The refund was initially retained because an assessment under s. 227.1 was pending. That assessment was abandoned. Nine months later, information about potential reassessments came to light. It was too late to retain the refund which should have been released when the section 227.1 assessment was abandoned.
2. The reassessment would enable the proving of a claim against the bankrupt estate, participation in the administration of the estate, opposing the taxpayer's application for an absolute discharge from bankruptcy.
3. The bankruptcy of a taxpayer does not necessarily mean that the debt becomes uncollectible.

									September 27, 2011

	Individual Returns Directorate			HEADQUARTERS
									Income Tax Rulings
									Directorate
	Attention: Daniel Desjardins, Manager		Lindsay Frank
	                 Internal Referrals Section     (613) 948-2227

									2010-038917

Reassessment of a Bankrupt Taxpayer

This is in reply to the request for a technical interpretation from Carrie Bartlett concerning the processing of a reassessment relating to a bankrupt taxpayer.

On April 27, 2007, the taxpayer’s return for the 2006 taxation year was assessed and an overpayment of tax was confirmed. The overpayment was retained for the purpose of applying it against a pending assessment under section 227.1 of the Income Tax Act (the “Act”). That provision holds a corporate director liable for a corporation’s failure to remit source deductions. The assessment was contemplated against the taxpayer after he asserted that a similar assessment raised against his wife was incorrect, as she was not a director of the company, but that he was.

The corporation is indebted for source deductions. On XXXXXXXXXX , the sheriff made a nulla bona return, attesting that the company was unable to pay the source deductions liability. The filing of the return met the prerequisite in paragraph 227.1(2)(a). In March 2008, following an audit of the corporation, a T4 information slip for the 2007 taxation year was issued to the taxpayer. On XXXXXXXXXX , the taxpayer was adjudged bankrupt, and remains undischarged. In October 2008, efforts to hold the director liable under section 227.1 were abandoned.

It was subsequently learned that the T4 income had not been reported on the 2007 return. It was alleged by XXXXXXXXXX that in 2007 the taxpayer may have appropriated funds from the corporation and may have been involved in XXXXXXXXXX fraud. If proven, such acts could constitute bankruptcy offences under section 198 of the Bankruptcy and Insolvency Act (“BIA”), as well as result in a reassessment under subsection 15(1) of the Act. XXXXXXXXXX .

Ms Bartlett has raised the following issues:

1. Can a refund be withheld for a lengthy period?
2. Can the 2007 taxation year be reassessed?
3. Can the 2007 debt be written off, given that the taxpayer is bankrupt?

1. Can a refund be withheld for a lengthy period?

Subsection 152(1) of the Act requires the assessment of a return “with all due dispatch”, see Ginsberg v. The Queen [1996] 3 C.T.C. 63 (F.C.A.), where the term was held to be equivalent to “with all due diligence” or “within a reasonable time”, and that it permits some discretion to be exercised according to the circumstances of each case. In Merlis Investments v. M.N.R., [2001] 1 C.T.C. 57 (F.C.T.D.), it was held that, when read in its entirety, subsection 152(1) confers some discretion on the timing of the assessment, particularly so where the delay in issuing is reasonably justified.

Accordingly, where an assessment results in a refund, discretion can be exercised on its release based on the circumstances of the case. Subsection 164(2) provides such discretion by permitting the Minister to retain a refund and apply it to an amount for which a taxpayer is liable, or is about to become liable. The principle in The Queen v. Simard-Beaudry Inc. 71 D.T.C. 5511 (F.C.T.D.) provides that an assessment does not create a debt; at most, it merely confirms that the debt exists. Rather, the debt arises by the operation of the Act.

As liability under the Act is not premised on an assessment, it follows that, under certain conditions, a refund may be held for application against a debt. If the liability under section 227.1 had been feasible at the time that the refund for the 2006 taxation year was established, the refund could have been withheld. If the decision not to pursue the section 227.1 liability was made when no other tax was payable, the refund must be issued. If at the time the decision was made not to pursue the section 227.1 liability, it was known that a potential subsection 15(1) liability existed in respect of appropriations made in 2006 or earlier, the refund can be withheld. If at the time the decision was made not to pursue the section 227.1 liability, it was known that the taxpayer had failed to declare income on the missing 2007 T4 slip, the refund can be withheld.

In the instant case, the information concerning the potential subsection 15(1) liability came to light after the decision was made not to pursue the section 227.1 liability. Accordingly, the refund must be released to the trustee in bankruptcy.

2. Can the 2007 taxation year be reassessed?

Under subsection 152(4) of the Act, a taxation year may be reassessed at any time within the normal reassessment period. Subsection 152(3.1) provides that the normal reassessment period ends within three years of the issuance of the initial assessment. Since the return for the 2007 taxation year was initially assessed on September 25, 2008, the reassessment for that year would need to be issued before September 25, 2011.

While there may be concern about the collectability of the reassessment, the reassessment would enable the claim against the estate to be proved, and allow the Crown to attend creditors’ meetings in respect of the administration of the bankrupt estate. Furthermore, it would provide the opportunity to oppose the taxpayer’s application for an absolute discharge from bankruptcy.

3. Should the liability for 2007 be written off, given the taxpayer is bankrupt?

Notwithstanding the principle in Simard-Beaudry, an amount cannot be written off unless it has been first assessed or reassessed. In addition, the bankruptcy of a taxpayer does not necessarily mean that a tax debt will be uncollectible.

It should be noted that some of the issues raised have policy implications, and as such, should also be referred to the Accounts Receivable Directorate for comment. Meanwhile, should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
International & Trusts Division
Income Tax Rulings Directorate

c. c. Lise Leclair
Internal Referrals Section
Individual Returns Directorate

Dominika Pankow
Internal Referrals Section
Individual Returns Directorate

Daniel Cude
Revenue Collections Section
Toronto North Tax Services Office