6 July 1999 Internal T.I. 9912477 - MEDICAL EXPENSES AND 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: Pursuant to “B” of the formula set out in subsection 118.2(1) of the Act, an individual in respect of a taxation year is entitled to utilize unclaimed medical expenses paid in any 12 month period ending in the taxation year (the 12 Month Rule). Under subsection 128(2) of the Income Tax Act (the “Act”), an individual who is bankrupt during a calendar year is required to file a pre bankruptcy return and a post bankruptcy return. Is it possible for the 12 Month rule to be applicable with respect to the post bankruptcy return?

Position: Yes

Reasons: Subsection 128(2) of the Act and section 118.95 of the Act set out a number of rules of the Act that relate to a bankrupt individual. However, there is no rule in those provisions that negates the possible application of the 12 Month Rule in respect of a post bankruptcy return.

		July 6, 1999	

	Winnipeg Taxation Centre 	HEADQUARTERS
	Rob Reid	M. Eisner
	Co-ordinator, T1 Processing	(613) 957-2138
		991247

Medical Expenses and Bankruptcies

We are writing in response to your enquiry of May 10, 1999, concerning the above-noted subject. We also acknowledge our telephone conversation on May 20, 1999 (Eisner/Reid).

You are concerned about the situation where an individual became a bankrupt on July 1, 1998, in circumstances where the following medical expenses had not been claimed on a prior return:

(a) $4,000 paid on December 1, 1997

(b) $5,000 paid on June 1, 1998

(c) $6,000 paid on December 31, 1998

In connection with this example, you have referred to TOM 40(10)5.32 which states the following:

“The medical expenses will be allowed based on the period for which the expenses were paid. If the medical expenses were paid in the pre-bankruptcy period or prior, the medical expenses may be claimed on the pre-return. If the medical expenses were paid in the post-bankruptcy period, they cannot be claimed on the pre or prior year return; they may only be claimed on the post return.”

In following TOM, you have indicated that $9,000 ((a) and (b)) could only be claimed in respect of the pre-bankruptcy period and that $6,000 (c) could only be claimed in respect of the post-bankruptcy period.

You have made the observation that, by allowing these claims, the total allowed is greater than the $11,000 maximum that could otherwise be claimed if the individual had not become bankrupt in the year.

Our Comments

Where an individual becomes bankrupt during a calendar year, paragraph 128(2)(d) of the Income Tax Act (the “Act”), provides that the taxation year of the individual ends on the day that is immediately prior to the day of bankruptcy and a new taxation year is deemed to have commenced on the day of bankruptcy. Accordingly, the individual has two taxation years that end within that calendar year with the first being from January 1 to June 30 (the day before the individual became a bankrupt (the “pre-bankruptcy period”)) and the second from July 1 (the date of bankruptcy) to December 31 (the “post-bankruptcy period”).

In connection with the pre-bankruptcy period and the post-bankruptcy period, section 118.95 provides rules to ensure that certain non-refundable tax credits are either subject to calculation on a pro rata basis (i.e., sections 118 (other than subsection 118(3) of the Act), 118.3, 118.8, and 118.9 of the Act)), or based on amounts (i.e., sections 118.1, 118.2, 118.5, 118.6, and 118.7 of the Act) in respect of the pre-bankruptcy period and/or the post-bankruptcy period of the bankrupt to which such an amount can reasonably be regarded as being wholly applicable to the taxation year. In all cases, the total of the amounts claimed in respect of each of these credits for both the pre and post-bankruptcy periods cannot be greater that the amount that could be claimed in respect of the calendar year if the individual had not become bankrupt.

With respect to the medical expense tax credit, you have indicated that eligible medical expenses can be claimed in any 12-month period ending in the year although, of course, a particular expense can only be claimed once. Pursuant to “B” of the formula set out in subsection 118.2(1) of the Act, an individual in respect of a taxation year is entitled to utilize unclaimed medical expenses paid in any 12-month period ending in the taxation year (the “12 Month Rule”).

As a result of the above comments, it is our view that the medical expenses in the example you have set out would be subject to the 12 Month Rule. In other words, the fact that an individual paid medical expenses in a pre-bankruptcy period would not, in and by itself, preclude the 12 Month Rule from being relevant in respect of the post-bankruptcy period. Accordingly, it is possible that the $4,000 paid on December 1, 1997, and the $5,000 paid on June 1, 1998 in your example, might be used by the bankrupt individual with respect to the pre-bankruptcy or the post-bankruptcy period (provided these amounts were not previously used in the calculation of the individual’s medical expense tax credit). However, with this choice, the individual could not claim any portion of the $6,000 until 1999, because of the 12 month rule.

It is also possible that the $5,000 paid on June 1, 1998 and the $6,000 paid on December 31, 1998 could be used with respect to the post-bankruptcy period or the individual’s return for the 1999 taxation year ($4,000 could also be claimed in the pre-bankruptcy period if the $11,000 is claimed in 1999). However, where $11,000 is claimed in the post-bankruptcy period, no claim could be made in respect of the $4,000 as a result of the 12 Month Rule.

Finally, $5,000 could be claimed in the pre-bankruptcy return and $6,000 on the post-bankruptcy return. However, with this choice, no claim could be available in respect of the $4,000 because of the 12 Month Rule.

We emphasize that any medical expense, which is taken into account by an individual in computing his or her income taxes payable in circumstances where the bankruptcy rules in the Act are relevant, must have been paid.

If you require further technical assistance, we would be pleased to provide our views.

J.F. Oulton, CA
Manager
Business, Property & Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

CC: Jack Szeszycki (A & C)

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