Section 128

Subsection 128(1) - Where corporation bankrupt

Administrative Policy

24 July 2013 External T.I. 2012-0455801E5 - Trustee in bankruptcy

The Act does not define what "property of the bankrupt in the trustee's possession" means. Instead, the BIA provides that what is comprised [sic] in the property of the bankrupt, with certain exceptions.

10 October 2007 External T.I. 2007-0243601E5 F - Proposal - Taxation year end

person who made a successful proposal was not a bankrupt

Regarding a corporation that had submitted a proposal under the Bankruptcy and Insolvency Act ("BIA") that was accepted by the creditors, and homologated by the Superior Court, with each creditor being paid according to the terms of the proposal, CRA stated:

Section 2 of the BIA specifically states in the definition of "insolvent person" that such a person is not bankrupt. Accordingly … Opco is not a bankrupt corporation for the purposes of subsection 128(1).

CRA went on to note that it had appealed the Marchessault Tax Court decision (subsequently reversed by Marchessault (FCA).

Words and Phrases

Income Tax Technical News, No. 8, 30 September 1996 "Bankrupt Corporation - Change of Fiscal Period"

A Corporation that becomes a bankrupt must obtain approval to change its fiscal period.

25 July 1995 External T.I. 9509495 - FISCAL PERIOD OF A BANKRUPT CORP

The fiscal period of a corporation would not be affected by its bankruptcy, notwithstanding that s. 128(1)(d) deems its taxation year to have ended on the day immediately before the day in which it becomes bankrupt and deems the new taxation year to have commenced on the day of bankruptcy.

16 January 1992 T.I. (Tax Window, No. 15, p. 10, ¶1703)

The annulment of the bankruptcy under s. 61(1) or 181(1) of the Bankruptcy Act is not retroactive and, therefore, does not invalidate the application of the rules in s. 128 for the period prior to the annulment.

10 December 1990 TI (Tax Window, Prelim. No. 2, p. 20, ¶1065)

An annulment of a bankruptcy does not invalidate the application of s. 128 for the period commencing on the date the taxpayer became bankrupt and ending on the date of the annulment.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 33

10 September 1990 Memorandum (Tax Window, Prelim. No. 1, p. 8, ¶1010)

Discussion of fiscal period issues respecting a bankrupt cash-basis farmer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) 9

Paragraph 128(1)(g)


Janette Pantry, Carrie Smit, "Tax Considerations in Restructuring under the Companies’ Creditors Arrangement Act", draft 2020 CTF Annual Conference paper

Generally no application of s. 128(1)(g) where proposal accepted (p. 8)

  • Although s. 128(1)(g) provides that any losses of the corporation for a taxation year preceding that in which an “absolute order of discharge” is granted will not be deductible in any subsequent year, if a bankrupt is successful in having a proposal accepted by its creditors, the bankruptcy would typically be annulled under BIA s. 61(1), so that no absolute order of discharge is issued (pursuant to an application under BIA, ss.169(4)), and the losses appear to be eligible for carryforward even though the debts likely are not paid in full.

Subsection 128(2) - Where individual bankrupt


Canada v. Marchessault, 2008 DTC 6496, 2007 FCA 345

person who made a proposal was not a bankrupt

The deemed year end under s. 128(2)(d) of the Act applied only to a "bankrupt" as specifically described in s. 2 of the Bankruptcy and Insolvency Act (the "BIA"), and did not extend to an individual (such as the taxpayer in this case) who had made a proposal notwithstanding the statement in s. 66(1) of the BIA that the provisions of the BIA would apply "with such modifications as the circumstances require" to proposals. Trudel J.A. noted (at para. 67) that Parliament had "exactly identified" the definition of "bankrupt" in the BIA and that "Parliament did not refer to the law applicable to a bankrupt under the BIA".

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. CRA positions not conclusive 51
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions related interpretation provision not referenced 112

See Also

Sinnott v. The Queen, 2000 DTC 2459 (TCC)

Because the trustee in bankruptcy of an undischarged bankrupt was that individual's agent, the sending of a notice of assessment to the trustee satisfied the obligation to provide notice of the assessment to the individual in respect of a separate return the individual had filed under s. 128(2)(f).

Administrative Policy

15 July 2008 External T.I. 2008-0279271E5 F - Frais de déménagement en cas de faillite

as s. 128 is a complete code not covering moving expenses, an individual could deduct moving expenses incurred in the stub pre-bankruptcy year from bankruptcy year income

In finding that moving expenses incurred by an individual in the year that was deemed to end immediately before the day of bankruptcy could be deducted in the taxation year commencing with the bankruptcy and ending on December 31, CRA stated:

[S]ection 128 is a complete code and … there are no rules preventing an individual from deducting qualifying moving expenses in the year of bankruptcy where those expenses were incurred in the year immediately preceding the bankruptcy.


Where an RRSP vests in the trustee under a proposal filed by an insolvent person under Part III of the Bankruptcy and Insolvency Act, s. 128(2) will not apply because the definition of "bankrupt" does not include an insolvent person or a trust created for the purpose of settling the debts of an insolvent person. In particular, where there is an assignment or transfer of the RRSP to the trustee, s. 128(2)(a) (which otherwise would deem the trustee to be an agent of the individual) will not apply, with the result that s. 146(2)(c) will require the inclusion in the individual's income of the fair market value of the property in the RRSP.

Paragraph 128(2)(a)

Administrative Policy

8 March 2016 Internal T.I. 2015-0614421I7 - Returns filed or amended by bankrupt taxpayer

authority of trustee to make s. 152(4.2) request does not preclude bnakrupt from doing so

CRA reversed its position in 2007-024648 that only the trustee of a bankrupt individual may make a request CRA to amend a tax return after the normal reassessment period for a taxation year prior to bankruptcy (within the 10 year limitation period)– so that CRA is permitted to act on such a request from the bankrupt individual.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Subsection 152(4.2) CRA not precluded from acting on otherwise-valid s. 152(4.2) requests by bankrupt individual 211

Paragraph 128(2)(f)

Administrative Policy

29 October 2015 External T.I. 2015-0589051E5 F - Pension income splitting and bankruptcy

s. 60.03 deductions/inclusions still available

In the context of confirming that a joint s. 60.03(1) election can be made by a pensioner and a pension transferee in the situation where the pensioner become a bankrupt, say, on June 1, 2015 or, alternatively, the pension transferee became bankrupt on that date, CRA noted that s. 128(2) does not exclude the joint s. 60.03, nor the inclusion or deduction under ss. 56(1)(a.2) and 60(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60.03 - Subsection 60.03(1) - Split-Pension Amount election available where pensioner or pension transferee is bankrupt/apportionment of split-pension amount 221

Paragraph 128(2)(g)

Subparagraph 128(2)(g)(iii)

Administrative Policy

7 June 2010 Internal T.I. 2009-0351031I7 F - Faillite changée en proposition

court approval of consumer proposal and individual’s discharge was not a s. 128(2)(g) unconditional discharge, so that individual thereafter could apply unused tuition tax credits

An individual became bankrupt in 2003. Returns for the pre-bankruptcy and post-bankruptcy periods were filed, and assessed in 2004. In 2005, the Court approved a consumer proposal under ss. 66.11 et seq. of the Bankruptcy and Insolvency Act (the "BIA") - made by the individual, which had the effect of cancelling the bankruptcy. During the 2002 to 2005 period, the individual incurred annual tuition fees for which credits under s. 118.5 were not claimed, so that for 2006, there were unused tuition tax credit amounts under s. 118.61.

Can these unused tuition tax credits be claimed in 2006? The Directorate stated:

Where a bankrupt individual files a consumer proposal, section 66.4(2) of the BIA provides, among other things, that the approval or deemed approval by the court of the consumer proposal operates to annul the bankruptcy and to revest the property of the individual, unless the terms of the consumer proposal otherwise provide. … [T]he discharge from bankruptcy is not retroactive to the time the individual was declared bankrupt but … is effective from the date the proposal is approved by the court. … Although section 128 does not recognize proposals filed under the BIA, the discharge from bankruptcy [in] 2005 does not invalidate the filing and assessment of pre- and post-bankruptcy tax returns made prior to the date of discharge. …

[T]he individual was bankrupt in the 2003 … 2004 … and the 2005 taxation year[s]. For each of those taxation years, he was unable to claim the tuition tax credit under section 118.5. Furthermore, under clause 128(2)(f)(iv)(C), the unused portion of his tuition tax credits was not deductible. Since the approval of the proposal by the Court and the discharge of the individual's bankruptcy does not amount to an unconditional discharge under paragraph 128(2)(g) … we do not believe that this paragraph deems the unused portion of his tuition tax credits to be nil. Consequently, the individual may carry forward the unused portion of his or her tuition tax credits at the end of the 2005 taxation year … to the 2006 taxation year pursuant to section 118.61.

Subsection 128(3)

See Also

Egard v. The Queen, 94 DTC 1232, [1994] 1 CTC 2407 (TCC)

A "bankrupt" does not include a person making a proposal. Accordingly, the taxpayer was not entitled to file returns on the basis that a new taxation year commenced on the day he filed a proposal.