3 July 1998 Internal T.I. 9731937 - FISCAL PERIODS - BANKRUPT INDIVIDUAL

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.

		July 3, 1998

	Individual Returns and Payments	HEADQUARTERS
	  Processing Directorate	B. Kerr
(613) 957-2139
	Attention: Jack Szeszycki
		973193

Application of Sections 34.1 and 34.2 to a Bankrupt

This is in response to your memorandum of November 28, 1997, concerning the application of sections 34.1 and 34.2 of the Income Tax Act (the “Act”) to a taxpayer who is a self-employed professional, both in the year the individual is assigned into bankruptcy and in the subsequent taxation year.

The taxpayer’s fiscal period ends on January 31. On February 1, 1995, the taxpayer was assigned into bankruptcy. The taxpayer continued the professional practice and elected to maintain a January 31 fiscal period under the provisions of subsection 249.1(4) of the Act.

You have requested that we confirm or clarify your understanding of the application of the rules in sections 34.1 and 34.2 of the Act in this situation.

Our Comments

As you know, where an individual becomes a bankrupt in a calendar year, paragraph 128(2)(d) deems the taxation year to end immediately before that time and a new taxation year is deemed to begin on the date of bankruptcy. This generally results in the individual having to file a pre-bankruptcy return for the period ending immediately prior to the assignment, and a post-bankruptcy return for the period commencing on the date of bankruptcy and ending on December 31. The pre-bankruptcy return would include the business income for the normal fiscal period ending on January 31, 1995. The post-bankruptcy return would include the business income for the fiscal period commencing on February 1 and, by virtue of the provisions of paragraph 249.1(1)(b) of the Act, ending on December 31, 1995.

As such, the taxpayer would have “December 31, 1995 income” for the purposes of the transitional reserve provisions in section 34.2 of the Act. However, subparagraph 34.2(6)(c)(ii) provides that no reserve in respect of “December 31, 1995 income” may be claimed in computing a taxpayer’s income for a taxation year from a business where the taxpayer is an individual that becomes a bankrupt in the calendar year in which the taxation year ends. This is so, even if the taxpayer elected to use the alternative method to maintain a fiscal period ending on January 31, 1996, under the provisions of subsection 249.1(4) of the Act. However, by making the election, the fiscal period would not end on December 31, 1995, such that, as you have suggested, there would be no income inclusion for the 1995 stub-period (February 1 to December 31) business income under subsection 34.1(1), by virtue of the provisions of paragraph 34.1(8)(b) of the Act.

Accordingly, we confirm that by making the subsection 249.1(4) election, the taxpayer will not have to report any of the 34.1(1) stub-period business income in the post-bankruptcy return for 1995, and has effectively deferred 100% of its inclusion until the 1996 taxation year, since that is the year in which the business income for the fiscal period that ends on January 31, 1996, would be reported. However, it should be noted that subsection 34.1(1) will apply in 1996, to require an amount to be brought into income for the 1996 stub-period business income, and no reserve may be claimed since there is no “December 31, 1995 income.”

B. Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

- 2 -