Bankruptcy – Discharge – High Income Tax Debt, Bankruptcy – Discharge Hearing, Bankruptcy – Income Tax Reassessment – Objection Process, Statutes – Interpretation – Bankruptcy and Insolvency Act, Section 172.1, Statutes – Interpretation – Income Tax Act, Section 128
The creditor objected to the discharge of the bankrupt from bankruptcy. The bankrupt filed tax returns and paid his taxes as required until he received a notice of reassessment requiring him to pay $1,193,367.84 in late 2016. The bankrupt objected to the reassessment. The Canada Revenue Agency (CRA) and the objecting creditor, the Minister of National Revenue (MNR), took the position that the Trustee in Bankruptcy (trustee) withdrew the objection. When the objection was withdrawn, the assessment was construed as certain and, accordingly, a provable claim in bankruptcy. The bankrupt indicated that he declared bankruptcy not to avoid taxes, but due to the collapse of the oil industry. He said that a sheriff was threatening to seize his assets in satisfaction of personal guarantee liabilities that arose with the economic challenge. MNR argued that the bankrupt should pay $5,000 and not be discharged from bankruptcy for two years, given the significant personal income tax liability. The trustee included the reassessed income tax amount in the bankruptcy estate as a proven claim because the trustee was advised that CRA confirmed the assessment. The trustee did express serious reservations about the tax liability in her report to the court. The issues were: 1) whether the bankrupt was honest but unfortunate: a) the objection process; and b) the factors; and 2) disposition.
HELD: The issues were addressed as follows: 1) because the bankrupt had more than $200,000 in personal income tax liability that amounted to 75% or more of the total proven unsecured claims under the bankruptcy, section 172.1 of the BIA governed the bankruptcy discharge process: a) the objection process – the court determined that it was not appropriate for it to ascertain whether the objection was properly closed. A trustee’s ultimate obligation is to the creditors, not to the bankrupt. The trustee indicated that she did not send a letter to the CRA withdrawing the bankrupt’s objection as wanted by the CRA because she did not have the authority to do so. The trustee also indicated that she advised CRA of the same. The court found that the CRA appeared to assume that the trustee was the bankrupt’s legal representative. A CRA representative was not available for the court to question, which was noted to lead to several problems. Section 128(2) of the Income Tax Act (ITA) renders the trustee the bankrupt’s agent, without exception, which could lead to CRA’s confusion. The agency role would typically mean only with regard to property rights, not rights of defence, but it could nonetheless lead to confusion. The court concluded that the bankrupt should be able to pursue the objection and appeal, notwithstanding his bankruptcy status. The bankrupt did initiate the objection, and there was a conflict between the ITA’s characterization of the trustee’s role and that role as contemplated by the BIA. The court proceeded to conduct the s. 172.1 analysis on the basis that the objection process was handled properly; b) factors – circumstances of the bankrupt at the time the debt was incurred - the bankrupt paid all his debts until the bankruptcy. The reassessment resulted from CRA’s finding that the bankrupt failed to report income in three tax years. The bankrupt guaranteed the loans of his son, who undertook residential development projects in rural oil rich-communities. In 2014, the economic conditions in Saskatchewan took a sharp decline when the price of oil plummeted. The bankrupt’s personal guarantees were called when his son’s loans went into default. The bankrupt received the reassessment from CRA around the same time as action was being taken on the guarantees. The bankrupt said that he never earned the income attributed to him by CRA in the reassessment. The court concluded that the circumstances under which the debt incurred remain unclear to the court. Efforts of the bankrupt to pay the personal income tax debt – the bankrupt did not pay any of the reassessed amount because he contested the figure and also because he did not have the funds to do so. Did the bankrupt make payments to other debts – there was no evidence the bankrupt made payments to other debts. The bankrupt’s wife purchased a vehicle when the family’s previous vehicle had been totalled. The son also made mortgage payments on the bankrupt’s house. He lived with the bankrupt at the time. The bankrupt’s prospects – the bankrupt was 65 and not employed. He lived with his wife, his son, and his son’s family. The bankrupt’s wife was disabled when their vehicle was totalled. The bankrupt suffered a head injury in the vehicle accident. The bankrupt was suffering something akin to a concussion that rendered him unable to work; 2) the court ordered the bankrupt to pay $5,000 as a condition of discharge. The order was made as an obligation of the court to render a deterrent measure, not because there was clear evidence of wrongdoing. The court did not order the two-year discharge suspension as sought by MNR.