15 August 1996 External T.I. 9616185 - WHICH RETURN FOR INC FOR FPE -> DATE OF 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.

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:

who reports the business or professional income of a bankrupt for the period which straddles the date of assignment into bankruptcy

Position:

depends on whether it is the trustee or the individual who carries on the business -if the case of a professional service where it is likely the bankrupt who carries on the business, the income is reported in the return filed by the bankrupt for the period commencing with the bankruptcy (the post-bankruptcy return). If it is the trustee, it is the return which is colloquially called the in-bankruptcy return.

Reasons:

128(2)(e) only requires the trustee to include income arising from the dealings of the trustee & 128(2)(f) requires the bankrupt to include all other income of the post bankrupt period
-the issue of whether and when a business ceases is a question of fact

A. Humenuk
XXXXXXXXXX							961618

Attention: XXXXXXXXXX

August 15, 1996

Dear Sirs:

Re: Reporting Business Income in the year of Bankruptcy

We are replying to your letter of May 1, 1996, in which you ask for clarification of the income reporting requirements applicable when an individual who is operating a business makes an assignment into bankruptcy.

Depending on the type of business involved and the degree to which the debts of that business contributed to the bankruptcy, a bankrupt may either continue to carry on a business which was operated by that bankrupt prior to the bankruptcy, or the bankrupt will cease to carry on the business when the trustee assumes control of the business assets. While under no obligation to do so under law, the trustee may choose to carry on the business of the bankrupt as agent.

In each of the following cases, you ask for our comments as to the correct method of reporting the business income or loss for a fiscal period which includes the date on which an individual has made an assignment into bankruptcy.

You state that it is common for a professional who is operating as a proprietorship to continue to carry on his or her professional practice after the assignment into bankruptcy. You suggest that the trustee will often lease or sell to the bankrupt any assets that are required for the operation of the business.

Unlike the situation with a professional practice, you note that a bankrupt will typically cease to carry on a business upon the assignment into bankruptcy when the trustee assumes control of the business assets and the nature of the business is such that the business can be operated independently of the bankrupt, such as in the case of a retail store or farm.

As stated in Interpretation Bulletin IT-179R "Change of Fiscal Period," we agree that the fiscal period of a business operated by a taxpayer does not end solely by reason of an assignment into bankruptcy. While a bankrupt may cease to carry on a business directly once the assignment into bankruptcy is made, the trustee is deemed to be the agent of the bankrupt under paragraph 128(2)(a) of the Income Tax Act and thus, a business does not automatically cease when control of the assets is transferred to the trustee. For the purpose of our response, we assume that the businesses in each of the situations has not, in fact, ceased to operate prior to the date of the assignment into bankruptcy.

Since the income or loss of a business for the fiscal period is included in the taxation year in which the fiscal period ends, the income or loss from a business which does not cease upon bankruptcy is included in the individual's income for the taxation year described in paragraph 128(2)(d) of the Act which commences with the date of the bankruptcy (and thus includes the date upon which the fiscal period ends). If it is the individual who continues to carry on the business, as would be expected in the case of a professional, it is the individual who is required to report that income or loss on the return which is required to be filed under paragraph 128(2)(f) of the Act (commonly called the post-bankruptcy return). If it is the trustee who continues to operate the business, it is the trustee who must report the income or loss on the return which is required to be filed under paragraph 128(2)(e) of the Act (commonly called the in-bankruptcy return).

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch