15 March 1996 External T.I. 9607945 - bankrupt corporation - deemed year end

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether deemed year end of a bankrupt is at date of receiving order or the date of the petition

Position:

the year end is on the date of the petition

Reasons:

	under the Bankruptcy and Insolvency Act, the period 	of the bankruptcy relates back to the date of the 	petition - the intent of the deemed year end is to 	separate the pre-bankruptcy income from that which 	arises during the bankruptcy

XXXXXXXXXX

Attention: XXXXXXXXXX

March 15, 1996

Dear Sirs:

Re: Deemed Year End of a Bankrupt Corporation

This is in response to your letter of March 1, 1996, wherein you requested a technical interpretation concerning the meaning of the expression "the day the corporation became a bankrupt" for the purposes of paragraph 128(1)(d) of the Income Tax Act (the "ITA").

At issue is whether a corporation becomes a bankrupt on the day that the receiving order is granted or on the day that the petition is filed for which a receiving order has been granted.

Paragraph 128(1)(d) of the ITA provides that the taxation year of a corporation is deemed to have ended on the day immediately before the day on which the corporation became a bankrupt. Subsections 128(3) and 248(1) of the ITA provide that the term "bankrupt" has the meaning assigned by the Bankruptcy and Insolvency Act (the "BIA"). Section 2 of the BIA defines a bankrupt as "a person who has made an assignment or against whom a receiving order has been made or the legal status of that person". Although the definition of a bankrupt makes reference to the receiving order having been made, pursuant to subsection 71(1) of the BIA the bankruptcy does not commence at the time the receiving order is made but is deemed to have commenced at the time the petition is filed.

Since the BIA defines a bankrupt as "a person... against whom a receiving order has been made", you note that paragraph 128(1)(d) of the ITA could be interpreted to consider that a person becomes a bankrupt on the date that the receiving order is granted and that is the day when the new taxation year is deemed to have commenced. However, you believe that the better view is that the date a corporation becomes a bankrupt is the day on which the petition is filed, notwithstanding that the receiving order is granted at some future date.

Our Comments

We agree with your view that, for the purposes of paragraph 128(1)(d) of the ITA, the expression "the day the corporation became a bankrupt" refers to the day on which the petition is filed, notwithstanding that the receiving order is granted at some future date. This interpretation is supported by the April 1995 Technical Notes to paragraph 128(2)(e) of the ITA which state that:

"Under paragraph 128(2)(d), where an individual becomes bankrupt in a calendar year, a taxation year of the individual is deemed to have ended on the day before the bankruptcy and a new taxation year of the individual is deemed to have begun on the day of the bankruptcy."

The wording in paragraph 128(2)(d) of the ITA is similar to that in paragraph 128(1)(d) in that it refers to the new taxation year commencing "on the day in the calendar year on which the individual became a bankrupt...".

You have also requested our views as to whether, pursuant to paragraph 128(1)(e) of the ITA, the trustee would be jointly and severally liable with respect to any taxes owing in respect of income earned by the bankrupt corporation prior to the date of the receiving order. In your view, although subsection 71(1) of the BIA provides that the effective date of the bankruptcy may be the date on which the petition is filed, the courts have held that the trustee's status takes effect on the date of the receiving order which appoints the trustee.

We regret that we are unable to agree with your views on the trustee's liability pursuant to paragraph 128(1)(e) of the ITA. In our view, the wording of paragraph 128(1)(e) is quite clear and provides that the trustee is jointly and severally liable for any tax payable by the bankrupt corporation for a taxation year which ends during the period that the corporation is a bankrupt. However, while the trustee may be jointly and severally liable for any tax payable in respect of such a taxation year, the trustee's liability is limited to the value of the bankrupt's assets which pass into the trustee's possession and to which the Department would otherwise be entitled under the BIA.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch