11620-6(AT)
March 2, 1995
XXXXX
This is in response to your memorandum of February 15, 1995 to Alyson Trattner of this unit. Our responses to the issues raised are as follows:
1. Does the assessment of tax payable relate to the pre-proposal period since that was when the tax was payable, or does it relate to the proposal period since the assessment is as a result of the proposal agreement between the debtor and its creditors? Alternately, would the assessment relate to period after the proposal stage as suggested by the accountant for the debtor since the proposal agreement contains a clause allowing creditors to sue for full settlement in the event of any default in the payments outlined in the proposal?
Response:
The assessment of tax payable should be raised effective the date the tax became payable to the supplier. As you note that the payable in question arose prior to the proposal stage, the assessment would be a pre-proposal assessment. We would use as our authority the imposition provision (ss. 165(1)) of the Excise Tax Act (ETA) which states that the recipient "shall pay (emphasis added) to Her Majesty in right of Canada a tax ...". Section 168 of the ETA then sets out when the tax becomes payable.
2. The assessment period could have a significant implication for collection of the debt. If the assessment period fell in the pre-proposal period, the Department would just rank as an unsecured creditor. In fact the Department has not filed any proof of claim before and might not be able to collect the debts.
Response:
The assessment period does have a significant implication on the collection of the debt. If the proposal is not fulfilled and bankruptcy results, the Department would at best rank with other unsecured creditors. However, there are some positive aspects in raising the assessment:
• If there is a pre-proposal credit or rebate due to the debtor, the Department will be able to offset a pre-proposal debit balance to the extent of that refund or rebate;
• The Department would be entitled to a share of any disbursements to be made to unsecured creditors under the proposal once the assessment is raised; By establishing itself as a creditor the Department can apply to the courts to annul a proposal if the Department felt there was default, delay or injustice; and
• As a creditor, the Department would be entitled to obtain information from the trustee and ensure that the trustee is looking after its interests. For example, the Department has suggested to trustees in bankruptcy that the Department expects the trustee to exercise due diligence and proactively inform the Department if the debtor is failing to meet its ongoing obligations to pay tax payable, file returns and remit net tax.
Note that the deemed trust for amounts collected as or on account of tax would continue in existence since the debtor is not yet bankrupt.
3. How is the proposal stage determined?
Response:
Chapter 5, Part 7 of the GST Collections Policy and Procedures Manual has been revised effective February 15, 1995. It provides an overview of commercial reorganizations and individual proposals under the Bankruptcy and Insolvency Act. As well it highlights issues of concern to the Department and the procedures to be followed by the collections officer in these situations. A copy of this material should be available at your local district office. We would also strongly suggest that you work closely with your collections office when making a final determination about the assessment.
As a final point, we would like to note that, if raised, the assessment should be for the full amount of the tax payable on the accounts receivable due to the suppliers, and not for the difference between the amount of tax that will be paid to the suppliers and the full amount of the tax owing. Once the debtor pays an amount or the Department receives proof that payment of a portion of that tax payable assessment has been paid to a supplier and that the amount has been accounted in the supplier's return and (as required) remitted as part of net tax, then the amount outstanding in respect of that assessment can be reduced by the amount that has been paid, accounted for and remitted. Where the debtor pays all or part of the assessed amount to the Department, the Department should notify the supplier that the supplier can adjust its net tax downward by the amount of the tax payable that has been paid to the Department.
For additional information please contact Alyson Trattner at 952-9578.
Dave Caron
Manager
Admin. & Enforcement Unit
XXXXX
| c.c.: |
D. Bennett
A. Trattner
C. Antonelli |
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