24 July 2013 External T.I. 2012-0455801E5 - Trustee in bankruptcy

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 a trustee in bankruptcy is required to pay secured creditors in priority to paying the tax liability. 2. Whether there is any requirement in the Income Tax Act for the trustee in bankruptcy to pay the bankrupt's income tax prior to a secured debt. 3. What is considered to be the "property of the bankrupt in the trustee's possession" for the purposes of paragraph 128(1)(e) of the Income Tax Act. 4. Whether the CRA can provide confirmation to a trustee in bankruptcy that the trustee's liability has been extinguished with respect to a corporation's tax payable.

Position: 1. Yes. 2. Possibly. 3. General comments provided. 4. No.

Reasons: 1. It is our understanding that the Bankruptcy and Insolvency Act (the " BIA") provides that a secured creditor takes priority over any unsecured creditors, including an unsecured claim by the Minister for federal income tax. 2. Subsection 223(11.1) of the Income Tax Act (the "Act") provides that where the Minister complies with subsection 87(1) of the BIA, an unsecured claim may be deemed to be a secured claim. 3. The Act does not define what "property of the bankrupt in the trustee's possession" is. The BIA provides what is comprised in the property of the bankrupt with certain exceptions. 4. There are no provisions of the Income Tax Act that provide confirmation to a trustee in bankruptcy that the liability for any tax payable of the bankrupt has been extinguished.

XXXXXXXXXX
2012-045580
Gillian Godson

July 24, 2013

Dear XXXXXXXXXX:

Re: Trustee in Bankruptcy

We are writing in reply to your email of July 11, 2012 regarding the requirements of a trustee in bankruptcy under the Income Tax Act (the "Act") in circumstances where a corporation which has become a bankrupt. We apologise for the delay.

You have requested our comments in relation to the following questions:

1. Where a trustee in bankruptcy has disposed of a Canadian resident Corporation's ("Canco") assets and realized proceeds of disposition thereon, is the trustee required to pay the secured creditors in priority to paying the tax liability?

2. Are there any provisions of the Act which would require the trustee in bankruptcy to pay Canco's taxes prior to repaying the Secured Loan?

3. According to subparagraph 128(1)(e)(i) of the Act, a bankrupt and the trustee in bankruptcy are jointly and severally, or solidarily, liable to pay the bankrupt's tax, except the trustee is only liable to the extent of the property of the bankrupt in the trustee's possession. In the situation described in the inquiry, what property of Canco's would be considered "the property of the bankrupt in the trustee's possession"?

4. Although subsections 159(2) and (3) of the Act exclude a trustee in bankruptcy from the requirement to obtain a clearance certificate, can a trustee in bankruptcy obtain confirmation from the Canada Revenue Agency that the trustee's liability with respect to Canco's tax payable has been extinguished?

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. As noted in paragraph 7 of IC 70-6R5, the CRA will not provide an advance ruling on a completed transaction. Where a situation involves a specific taxpayer and a completed transaction, the request should be addressed to the relevant tax services office. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature and are not binding on the CRA.

Our Comments

In general, where a corporation has become a bankrupt, subsection 128(1) of the Act provides a number of specific rules that are applicable. In that regard, paragraph 128(1)(a) deems the trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act. Therefore the trustee is required to perform tasks that the corporation would ordinarily be required to do under the Act. For example, the trustee is required to file tax returns in accordance with subsection 150(3) of the Act. In that regard, paragraph 128(1)(d) of the Act deems the corporation's taxation year to end on the day immediately prior to the date of bankruptcy, and deems a new taxation year to have started on the date of bankruptcy. During the period of bankruptcy, the bankrupt corporation and the trustee are jointly and severally, or solidarily, liable to pay the corporation tax. However, the trustee's liability is limited to the property in his possession, pursuant to 128(1)(e) of the Act.

In regard to your specific questions, we have the following general comments.

1. It is our understanding that subsection 136(1) of the Bankruptcy and Insolvency Act ("BIA") provides that the proceeds realized from the property of a bankrupt shall be applied, subject to the rights of secured creditors, in the priority of payment set out therein. As such, it is our understanding that a secured creditor has a priority over other creditors of the bankrupt, including any unsecured income tax payable.

2. Generally, there are no provisions of the Act that would give the tax liability priority over a secured creditor. However, subsection 223(11.1) of the Act provides that a claim that is registered in accordance with the BIA is deemed to be a secured claim. Therefore, a federal claim for income tax payable could be a ranked as a secured claim under the BIA, if the Minister complies with subsection 223(11.1) of the Act and the BIA.

3. Paragraph 128(1)(e) of the Act provides that the corporation and the trustee in bankruptcy are jointly and severally, or solidarily liable to pay any tax payable by the corporation, except that the trustee is only liable to the extent of the property of the bankrupt in the trustee's possession.

The Act does not define what "property of the bankrupt in the trustee's possession" means. Instead, the BIA provides that what is comprised in the property of the bankrupt, with certain exceptions.

4. There are no provisions of the Act that provide confirmation to a trustee in bankruptcy that the liability for any tax payable of the bankrupt has been extinguished. The trustee in bankruptcy is required to file any returns of the bankrupt required by section 150 of the Act. It should be noted that, in accordance with subsection 152(7) of the Act, the Minister is not bound by information supplied by or on behalf of a taxpayer and may, notwithstanding that information, assess any tax payable.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CA, CPA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch