19 May 2010 Internal T.I. 2009-0331691I7 - Treatment of a Post-Bankruptcy Refund

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.

Principal Issues: Whether a post-bankruptcy refund can be applied against a pre-bankruptcy debt after the bankrupt has received an absolute from bankruptcy.

Position: No.

Reasons: The refund is an amount owing subsequent to the date of bankruptcy and cannot be applied to an amount owing at the date of bankruptcy.

May 19, 2010

	Individual Returns Directorate	HEADQUARTERS
	Processing Division	            Income Tax Rulings
		                                  Directorate
	Attention: Brian Caldwell	      Lindsay Frank
	Manager, T1/T3 Accounting Section	(613) 948-2227

		2009-033169

The Treatment of a Post-Bankruptcy Refund

This is in reply to an email from Valorie Bunce. At issue is whether a post-bankruptcy refund could be set off against the pre-bankruptcy debt, after the bankrupt has received an absolute discharge from bankruptcy.

The taxpayer was adjudged bankrupt on XXXXXXXXXX , at which time he was in arrears of income tax. On XXXXXXXXXX , his return for the XXXXXXXXXX taxation year was assessed, resulting in a refund. On XXXXXXXXXX , a collections officer requested that the refund be retained, pursuant to subsection 164(2) of the Income Tax Act and offset against the outstanding arrears. The taxpayer received an absolute discharge from bankruptcy on XXXXXXXXXX . On XXXXXXXXXX , the refund for XXXXXXXXXX was applied to the bankrupt's pre-bankruptcy tax arrears.

The collections officer is of the view that the refund for the XXXXXXXXXX taxation year should be released to the taxpayer, since it was applied to the debt after the obtaining of the absolute discharge. As explained below, we share the view that the refund should be released to the taxpayer, but for an entirely different reason.

Subsection 97(3) of the Bankruptcy and Insolvency Act recognises the law of set-off where there is a mutuality of debts, which is not the case here. In this instance, the refund owing to the bankrupt arose subsequent to the date of bankruptcy; whereas, the tax arrears are a pre-bankruptcy debt, see Re Kryspin (1981), 40 C.B.R. (N.S.) 67 (Ont. S.C.). Accordingly, the refund cannot be set off and must be released to the taxpayer.

In closing, it should be noted that it is the year of the refund or the credit that is determinative as to whether the refund or the credit could be retained and applied as offset. It is not the date when a collections officer requests the offset be carried out.

Should you have any questions or require clarification, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Valorie Bunce
T1/T3 Accounting Section
Processing Division
Individual Returns Directorate