John Francis Collins v. Minister of National Revenue, [1983] CTC 2166, [1983] DTC 156

John B Goetz:—This is an appeal by the appellant with respect to his 1979 taxation year. He was self-employed as a lawyer until May 19, 1979, at which time he filed an assignment in bankruptcy. From May 4, 1979 to December 31, 1979, he was self-employed as a taxi driver and as a lawyer but stated that he had no taxable income for that period. He obtained a discharge in bankruptcy in October 1979. By notice of assessment dated September 23, 1980, the appellant was assessed the sum of $381.60 for the 1979 taxation year on account of Canada Pension Plan contributions in respect of his self-employed earnings for that year, plus interest.

The issue to be determined is whether Canada Pension Plan contributions payable on self-employed earnings become a debt under section 222 of the Income Tax Act SC 1970-71-72, c 63, as amended, by virtue of section 37 of the Canada Pension Plan.

In assessing the appellant, the respondent relied, inter alia, on sections 2, 10, 12, 13, 35, 37 and 38 and subsections 31(1) and (3) of the Canada Pension Plan, RSC 1970, chapter C-5, as amended; section 222 and subsection 128(2) of the Income Tax Act; and sections 2 and 95 and subsection 148(2) of the Bankruptcy Act, RSC 1970, chapter B-3, as amended.

The appellant felt that his discharge in bankruptcy in October 1979 amounted to an absolute discharge of any and all claims provable, contingent or future. He argued subsection 95(1) of the Bankruptcy Act which States as follows:

95. (1) All debts and liabilities, present or future, to which the bankrupt is subject at the date of the bankruptcy or to which he may become subject before his discharge by reason of any obligation incurred before the date of the bankruptcy shall be deemed to be claims provable in proceedings under this Act.

The appellant admitted that the Bankruptcy Act puts the Department of National Revenue in a preferred position. Section 107 of the Bankruptcy Act, among other things, provides that:

.. .the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(h) all indebtedness of the bankrupt under any Workmen’s Compensation Act, under any Unemployment Insurance Act, under any provision of the Income Tax Act or the Income War Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld, pari passu;

(j) claims of the Crown not previously mentioned in this section, in right of Canada or of any province, pari passu notwithstanding any statutory preference to the contrary.

The appellant maintained that the tax liability was a debt provable in bankruptcy as the Act specifically mentions: “all indebtedness.. .under any provision of the Income Tax Act..or any “claims of the Crown.. .in right of Canada”. He advised the Board that Revenue Canada was given notice of the bankruptcy by registered mail and could have taken the steps provided for in the Act for recovery of their debt. He said: “instead it (Revenue Canada) is protected under the Act for recovery of their debt”, but rather, Revenue waited until after his discharge and then assessed him his liability for tax on income received prior to the date of his bankruptcy.

The respondent simply maintains that the debt to Her Majesty the Queen in right of Canada did not arise before the appellant’s assignment in bankruptcy, nor did such debt accrue before his discharge in bankruptcy, and that he was not subject to any liability in this regard at any time before the date of his discharge from bankruptcy. The respondent contended that the appellant’s claim, was not, therefore, a provable claim within the meaning of section 95 of the Bankruptcy Act.

The respondent maintained that the provisions of subsection 128(2) of the Income Tax Act created two taxation years for the appellant, one up to and immediately before the period of bankruptcy, and the second for the balance of the calendar year. Subsection 128(2) seems to be all-embracing with respect to an individual becoming bankrupt and placing severe restrictions upon the trustee in bankruptcy.

The Crown also relied upon section 37 of the Canada Pension Plan which reads as follows:

Sec 37. Application of provisions of Income Tax Act — Subject to this Part and except as otherwise provided by regulation, the provisions of Divisions I and J of Part I of the Income Tax Act with respect to assessments, payment of tax, objection to assessments, payment of tax, objections to assessments and appeals, and the provisions of Part XV except section 221 of that Act apply mutatis mutandis in relation to any amount paid or payable as or on account of a contribution for a year in respect of self-employed earnings as though that amount were an amount paid or payable as or on account of tax under that Act. (Italics mine). Findings

Section 2 of the Canada Pension Plan defines “year” as follows:

“‘year’ means a calendar year;”.

Therefore, there was no debt or contingent debt or existing claim in May 1979 when the appellant made his assignment in bankruptcy, nor was there a liquidated claim extant at that time.

The appellant responded to this argument by citing the case of Re Ronval Ltd, 19 OR (2d) 440, a decision of the Supreme Court of Ontario with respect to bankruptcy. This dealt with the Minister of National Revenue having 90 days “from the time evidence of facts on which his claim is based comes to his attention to file a proof of claim with the trustee in bankruptcy of the taxpayer”. Unfortunately, this case involved a claim from the taxing authority for amounts deducted but not remitted by the bankrupt. The Court went on the premise that the Department of National Revenue had sufficient evidence to file some form of assessment at the time. The learned trial judge commented at 444:

The taxing authority is already afforded by the provisions of the section (section 120 of the Bankruptcy Act) accommodations in the way of making a proof of claim substantially more generous than those afforded other creditors.

The said judge found in favour of the bankrupt and precluded any claim since the taxing authority had had sufficient information and had failed to disclose their right to claim remittance of deductions prior to the discharge in bankruptcy. As can be seen, this case does not apply to the case at bar.

Pursuant to the provisions of the Canada Pension Plan, contributions cannot be determined until the end of the calendar year. That being so, the claim of the Crown in this assessment of the sum of $381.60 plus interest for the 1979 taxation year was not provable at the time of the assignment in bankruptcy, and therefore could not be discharged pursuant to the provisions of section 148 of the Bankruptcy Act.

The appeal is dismissed.

Appeal dismissed.