11 October 2011 Internal T.I. 2011-0404211I7 - Refund paid in error to a bankrupt

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 subsection 160.1(1) applies to a refund paid in error such that it would be an excess refund that is payable by the taxpayer.

Position: Subsection 160.1(1) the ITA would apply to a refund in respect of the year which is deemed to begin in accordance with sub-paragraph 128(2)(d)(i) of the ITA.

Reasons: See below.

									October 11, 2011

	Assessment and Benefit Services Branch		HEADQUARTERS
	Individual Returns Directorate			Income Tax Rulings
									  Directorate
	Attention:	Yves Boissonneault, Manager		Richard Aronoff
		Pensions and Partnership Projects		(613) 941-7239

									2011-040421

Recovery of Excess Refund Paid to Trustee of Individual Bankrupt

This is in response to the email from Marlyss Anderson concerning the recovery of an excess refund paid to the trustee of an individual bankrupt in accordance with the provisions of paragraph 67(1)(c) of the Bankruptcy and Insolvency Act (the "BIA"). The question related to whether the taxpayer was liable under subsection 160.1(1) of the Income Tax Act (the "ITA") to the extent of the excess refund, and the consequence of the bankrupt's discharge, if any.

Pursuant to subsection 128(2) of the ITA the year in which an individual becomes bankrupt consists of two separate taxation years. Sub-paragraph 128(2)(d)(ii) provides that the individual bankrupt's last taxation year (the "pre-bankruptcy year") that began before the date of bankruptcy is deemed to have ended immediately before that date. Conversely, sub-paragraph 128(2)(d)(i) provides that a taxation year (the "post bankruptcy year") is deemed to have begun at the beginning of the day on which the individual became bankrupt.

The taxpayer's discharge from bankruptcy would only be relevant where the excess refund related to the pre-bankruptcy year in that the discharge would have released the bankrupt from all claims provable in bankruptcy, including any liability under subsection 160.1(1) of the ITA, see subsection 168.1(6) and 178(2) of the BIA. On the other hand, if the excess refund were to relate to the post bankruptcy year or to a subsequent year, the liability under subsection 160.1(1) could be assessed since it would not have been affected by the bankruptcy.

Paragraph 67(1)(c) of the BIA provides in part that the property of the bankrupt divisible among his or her creditors includes any refund owing to the bankrupt under the ITA in respect of the calendar or fiscal year in which the bankrupt became bankrupt. The wording effectively includes any refund relating to the post bankruptcy year. Where a bankrupt has not filed returns for a taxation year, subsection 150(3) requires the trustee to do so. However, that requirement only applies to the pre-bankruptcy year and preceding years. The taxpayer is responsible for filing the return for the post-bankruptcy year. Hence, any excess refund relating to the post bankruptcy year is the direct result of a return filed by the bankrupt.

Whether a bankrupt has any recourse against the trustee in such circumstances is outside the scope of this interpretation. Should the bankrupt wish to pursue a claim against the trustee, it would be prudent for him or her to obtain independent legal advice.

Should you have any questions or require additional information, please do not hesitate to telephone Richard Aronoff at the number provided at the outset of this memorandum.

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

cc. Marlyss Anderson
Senior Programs Officer
Pensions and Partnerships Projects
Individual Returns Directorate
Assessment and Benefit Services Branch