Principal Issues: Whether a refund for the calendar year of a bankruptcy can be offset?
Position: Yes.
Reasons: A refund in respect of the calendar year of bankruptcy forms part of a bankrupt estate, pursuant to paragraph 67(1)(c) BIA. However, exceptions permit offset under subsection 164(2) to limit its operation. The exceptions include:
(1) liability of a proprietorship or partnership for source deductions or GST/HST that arose before the proprietor's or partner's bankruptcy;
(2) a derivative assessment under subsection 159(3), 160(1), 224(4), or 227.1(1) ITA where the liability arose from an act or failure that occurred after the date of bankruptcy;
(3) a derivative assessment under subsection 270(4), 317(7), 323(1), or 325(1) ETA where the liability arose from an act or failure that occurred after the date of bankruptcy;
(4) an income tax liability for a year subsequent to the year of bankruptcy where the liability arose before the return claiming the refund was filed;
(5) a derivative assessment for a director's liability under subsection 227.1(1) ITA or 323(1) ETA where the corporation's failure to remit occurred before the individual's bankruptcy, but the precondition in paragraphs 227.1(2)(a), (b), or (c ) ITA or 323(2)(a), (b), or (c) ETA was not met until after the date of the individual's bankruptcy.
Legal advice should be sought:
(1) to determine whether a deemed trust claim under subsection 227(4) or (4.1) ITA in respect of a source deductions liability of a proprietorship or partnership which arose before the bankruptcy of the proprietor or partner would have priority over paragraph 67(1)(c) BIA; and
(2) to ascertain if other situations exist where subsection 164(2) ITA might have priority over paragraph 67(1)(c) BIA.
