7 June 2012 Internal T.I. 2012-0435561I7 - Refunds on Post-Bankruptcy Returns

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: Should an overpayment of taxes for the post-bankruptcy taxation year be issued to the trustee in bankruptcy?

Position: Yes.

Reasons: Paragraph 67(1)(c) of the Bankruptcy and Insolvency Act states that a refund arising from the calendar year of a bankruptcy vests in the trustee. The post-bankruptcy refund arises from the filing of the return for the post-bankruptcy year, which is a part of the calendar year. It follows that the post-bankruptcy refund should be sent to the trustee.

							June 7, 2012

Individual Returns Directorate		HEADQUARTERS
Processing Division				Income Tax Rulings
							  Directorate
Attention:	Valorie Bunce			Lindsay Frank
		T1/T3 Accounting Enquiries	(613) 957-2097
		Section
							2012-043556

Refunds on Post-Bankruptcy Returns

We are replying to your request for a technical interpretation regarding the disposition of amounts payable to a bankrupt taxpayer.

In your example, a bankrupt taxpayer miscalculated his tax liability on his post-bankruptcy return and remitted the amount that he thought he had owed. The mistake was uncovered and as a result, an overpayment was assessed. At issue, is whether that overpayment should be sent to the trustee in bankruptcy (the “Trustee”). As explained below, the overpayment belongs to the bankrupt estate and should be sent to the Trustee.

Pursuant to paragraph 249(1)(b) of the Income Tax Act (the “Act”), an individual’s taxation year is ordinarily the calendar year. However, in the year in which an individual becomes bankrupt, paragraph 128(2)(d) creates two taxation years in the calendar year. Subparagraph 128(2)(d)(i) deems a taxation year to have begun on the day of bankruptcy (the “Post-bankruptcy Period”), while subparagraph 128(2)(d)(ii) deems the last taxation year to have ended immediately before the day of bankruptcy. Subsection 150(1) requires a tax return to be filed for each taxation year.

Pursuant to section 71 of the Bankruptcy and Insolvency Act (the “BIA”), a bankrupt’s property vests in the trustee. Paragraph 67(1)(c) of that statute provides that such property includes any refund owing to the bankrupt under the Act, in respect of the calendar year in which the individual became bankrupt. Given that the refund arose because the individual made an error on his return, you have asked us to confirm whether the refund should be paid to the trustee or to the individual.

An income tax refund arises from an overpayment of taxes. Subsection 164(7) of the Act defines an overpayment as the excess of the amount paid for a particular taxation year over the amount payable for that year. To obtain a refund, pursuant to paragraph 164(1)(b), a taxpayer has to file a return and claim the refund no later than three years after the end of that year. However, paragraph 164(1.5)(a) of the Act permits the Minister to refund to an individual (other than a trust) or a testamentary trust an overpayment for a taxation year, where the taxpayer’s tax return for the taxation year was filed no later than ten calendar years after the end of the taxation year.

There is nothing in the definition of overpayment or the provisions governing the payment of refunds that prescribes a different treatment of a refund based on the source of the funds comprising the refund or the reasons why the refund arose. Consequently, since the Post-bankruptcy Period is a component of the calendar year in which the taxpayer became a bankrupt, and since an income tax refund is considered to be property under the BIA vesting in the trustee, it follows that a refund that arises from the filing of the post-bankruptcy return should form part of the bankruptcy estate. Accordingly, the overpayment should be issued to the trustee as required by the BIA.

Should you have any questions or require additional information, please contact Lindsay Frank at the number provided at the outset of this memorandum.

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch