29 June 1999 External T.I. 9907705 - TRUSTEE'S LIABILITY - IN-BANKRUPTCY RETURN

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: The extent to which a trustee in bankruptcy is liable for income taxes arising on a disposition of assets held in the estate of the bankrupt.

Position: Under law, it would appear that the bankrupt is liable for all of the income taxes arising in this situation. However, informally, the Revenue Collections Directorate said that this liability is limited to the assets under the trustee's control.

Reasons: Paragraph 128(2)(e) indicates that the trustee is liable for any income taxes arising in dealings of the estate of the bankrupt.

XXXXXXXXXX 5-990770
J. Gibbons
Attention: XXXXXXXXXX

June 29, 1999

Dear XXXXXXXXXX:

As suggested, we are replying to you directly concerning a letter dated March 17, 1999, from Mr. H. Zerbin of the Winnipeg Tax Services Office. The letter requested our views on a number of questions raised in a letter dated December 14, 1998, from a representative of a trustee in bankruptcy. These questions concerned Revenue Canada's treatment of certain transactions involving a bankrupt's estate. As discussed in our telephone conversation of June 22 (Gibbons/XXXXXXXXXX), we have limited our response to the interpretation of the trustee's liability under paragraph 128(2)(e) of the Income Tax Act. The other questions appear to relate principally to collection policy.

As we understand it, the trustee has filed an application with the Winnipeg provincial court for advice and direction concerning the proper disposition of certain multiple-unit residential buildings (MURB's) which form part of the Bankrupt's estate. According to an affidavit filed by an officer of the trustee, the proceeds from the sale of the MURB's would be less than the income tax payable in respect of such sale. Accordingly, depending on the decision as to the treatment of this tax liability, the disposition of the MURB's has the potential to affect detrimentally the creditors of the Bankrupt's estate.

Paragraph 128(2)(e) of the Act provides that a trustee is liable for any income tax arising from dealings in the estate of the bankrupt or acts performed in the carrying on of the business of the bankrupt by the estate. Accordingly, it is our view that this provision makes a trustee liable for any income tax that may arise on the disposition of property held in the estate of the bankrupt, for example, as a result of the recapture of capital cost allowance or taxable capital gains. The Revenue Collections Directorate at Headquarters has advised us informally that they view a trustee's liability under this paragraph to be limited to the value of the assets under the trustee's control. If written confirmation of this aspect is required, we suggest that you confer with officials in Revenue Collections of the Winnipeg Tax Services Office.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

c.c. H. Zerbin, Winnipeg Tax Services Office