Tax Disputes with the Canada Revenue Agency

Dealing with the Canada Revenue Agency (“CRA”) during tax time can be stressful for taxpayers. However, tax debts can create a tremendous amount of stress for individual and corporate taxpayers alike. Sometimes tax debts create an unforeseen insolvency issue which requires a taxpayer to enlist the assistance of a bankruptcy trustee to file a consumer proposal or assignment to bankruptcy to compromise their tax liabilities. However, depending on the amount of tax debt (usually if the personal tax debt exceeds more than $200,000.00), legal counsel from the Department of Justice will oppose a tax debtor’s discharge from bankruptcy. CRA will usually insist on payment to the tax debtor’s bankrupt estate representing anywhere between 20% – 70% of the tax liabilities in tax-driven bankruptcies [1].

Where CRA is the largest – or only – creditor it is usually prudent to get advice whether there are grounds to fight the tax assessment or deal with the CRA debts outside the insolvency context.

Ignoring your tax debts is generally a bad idea. CRA has the ability to have the tax debts certified as a judgment in Federal Court, and register this judgment against a taxpayer’s interest in land. CRA can then proceed with a forced sale of the property to satisfy the judgement. Furthermore, CRA can freeze bank accounts and garnish wages, which can be highly disruptive to a taxpayer’s personal life or business. In other cases, CRA will hire bailiffs to seize and sell property of the tax debtor.

Outside of the insolvency context, there are a number of mechanisms that can assist taxpayers in resolving their taxes issues with CRA. A cursory list is below – as each of these topics could easily cover its own blog post.

1. Dispute the Tax Assessments/Reassessments

Pursuant to section 152 (8) of the Income Tax Act once a tax assessment is made, it is binding unless set aside by objection or on an appeal at the Tax Court of Canada.

Taxpayers have the right to dispute their tax assessment or reassessment by filing a Notice of Objection to the Chief of Appeals in the taxpayer’s local tax service office. There are strict deadlines to file a Notice of Objection. If the Appeal’s officer dismisses the objection, the taxpayer can appeal to the Tax Court of Canada [2].

2. Payment Arrangements

If there are outstanding tax debts, a taxpayer can attempt to enter into a payment arrangement with a CRA tax collector. This can be done with or without the assistance of legal counsel. The CRA tax collector will usually take into account the taxpayer’s personal circumstances when making payment arrangements. However, interest on the CRA debt continues to run even when a payment arrangement is entered.

3. Voluntary Disclosure Program

Taxpayers can make on a named or no-name basis, a voluntary disclosure provided the following criteria are met:

(a)Voluntary – the taxpayer must not be aware or have knowledge of any CRA collection or audit action;
(b) Complete – the taxpayer must provide full and accurate facts for the tax year or reporting period where the inaccuracies exist;
(c) Penalty – the disclosure must involve the application of a penalty (e.g. a late filing fee); and
(d) One year past due – the disclosure must be at least one year past due (this is usually strictly app
lied).

If accepted by CRA, the taxpayer will be not be charged any penalties and may receive partial interest relief. If the CRA officer’s reasons are unjustified or unreasonable, the taxpayer has the ability to pursue a review of the CRA officer’s decision in Federal Court by way of judicial review [3].

4. Request for Taxpayer Relief

In some cases, CRA will forgive a taxpayer from interest in penalties where the following exist:

(a) extraordinary circumstances;
(b) actions of the CRA;
(c) inability to pay or financial hardship; and
(d) other circumstances which do not fall into the above-enumerated categories.

There are a number of factual circumstances and factors which may warrant CRA to cancel or forgive interest or penalties. These are detailed in Information Circular IC07-1 (Taxpayer Relief Provisions) [4].

5. Remission Order

As a last-ditch effort, and when a taxpayer has exhausted all other avenues for relief, taxpayers can apply for a Remission Order to forgive or refund taxes, interest, penalties. A Remission Order is made under section 23 of the Financial Administration Act and is carried out by the Federal Government. The sort of matters a remission order may cover include:

• unintended results of the legislation;
• financial setback coupled with extenuating factors;
• incorrect action or advice by CRA officials; and
• extreme hardship.

Again, these tend to be fact specific reasons why relief should or should not be sought. If the taxpayer is unsuccessful they can seek judicial review of the decision in Federal Court.

In conclusion, there are a number of avenues for tax relief that a taxpayer should explore when dealing with an audit, tax assessment or tax debts. Although, depending on a taxpayer’s personal circumstances, the only realistic option might be to make an assignment into bankruptcy or a proposal under the provisions of the Bankruptcy and Insolvency Act. Even for strategic reasons, it may make sense to reduce a taxpayer’s tax liabilities as much as possible to allow the argument at the taxpayer’s bankruptcy discharge hearing that the bankruptcy is not strictly “tax driven”.

[1] ReAnh Thi Dinh, 2017 YKSC (Yukon Supreme Court) , at para 27 to 32 (link to decision: http://www.yukoncourts.ca/judgements/supreme/2007/2017_yksc_24_re_anh_thi_dinh.pdf)
[2] http://www.cra-arc.gc.ca/E/pub/tp/ic00-1r5/ic00-1r5-e.pdf
[3] http://www.cra-arc.gc.ca/E/pub/tp/ic00-1r5/ic00-1r5-e.pdf
[4] http://www.cra-arc.gc.ca/E/pbg/tf/rc4288/rc4288-16e.pdf

Responsibility of the Step Parent to provide child support

BY KIRAN BRAR, APRIL 19, 2017

To what extent does the step parent owe responsibility to provide child support? This question is a big concern for many couples who want to be in a relationship, but are scared of stepping into the shoes of a parent for their step children.

What is the definition of a step parent? The Family Law Act [S.B.C. 2011, C.25] (“FLA”) defines step parent as a spouse of the child’s parent and having lived with the child’s parent and the child during the child’s life.

Therefore, the first requirement to be a step parent is that a person needs to qualify as a “spouse”; that means a person either needs to get married to the child’s parent, or has lived with the child’s parent in a marriage-like relationship for at least 2 years, or has a child with the child’s parent.

Section 147(4) of the FLA provides that a child’s step parent does not have a duty to provide support for the child unless the step parent has contributed to the support of the child for at least one year, and a court proceeding for the child support against the step parent is started within one year after the date the step parent last contributed to the support of the child.

In D. (D.C.) v. C.(R.J.P.), 2014 BCSC 2420, the court held that the expenditures by the step parent on behalf of the step child that are trivial in nature, sporadic, or in the character of gestures of occasional generosity or kindness may not qualify as contributions that attract a duty of support.

In MME (Guardian Ad Litem) v. LMJ, 2002 BCCA 568, a jury’s decision finding the step parent not liable for support was found reasonable by the Court of Appeal because, although the parties shared a bank account from which child expenses were paid from, there was no evidence the guardian contributed to this account past the amount he withdrew from it.

Section 147(5) of the FLA says that a duty to provide support for a child by a step parent is secondary to that of the child’s parents and guardians, and extends to be based on the standard of living experienced by the child and the length of time during which the child lived with the stepparent.

In Russenberger v. Rebagliati 2000 BCSC 82 (CanLII), it was found that since the step parent supported the children, indirectly, by bearing the cost of the home the children were living in for some time after the relationship, the step parent’s support obligations were satisfied and the Court would not order any further support.

According to section 149 of the FLA, the step parent has a duty to provide child support only when the step parent and the child’s parent are separated.

Section 5 of the Child Support Guidelines grants discretion to the court to determine the quantum of support payable by a stepparent:

  • Where the [person] against whom a child support order is sought stands in the place of a parent for a child, the amount of a child support order is, in respect of that [person], such amount as the court considers appropriate, having regard to these Guidelines and any other parent’s legal duty to support the child.

To summarise, the step parent has to be cautious not to assume a parent’s role voluntarily, if he/she does not want to be in place of a parent and be liable for child support when separated from the parent of the child. Occasional gifts or buying treats or meals for the child may not affect the step parent’s position of not assuming parent’s role, as long as the step parent is not assuming the financial liability of the child.

If you find yourself in such a situation, please contact the writer for legal advice.

CASL – Anti-spam Legislation

On July 1, 2017, the transition period ended for Canada’s new anti-spam legislation (“CASL” – pronounced ‘castle’) [1]. This means that businesses and individuals doing business in Canada should be CASL compliant though the entire act is not yet in order. For example, the private right’s provision for litigants to sue under CASL has been suspended. However, what does this mean for businesses and individuals engaging in business activities? To the point, why should they care? Simply put, it means that unaware businesses or individuals could be caught by this new anti-spam legislation and face significant exposure from regulatory bodies but also lawsuits in the future.

The Canadian Radio-Television & Telecommunication Commission (“CRTC”) is responsible for investigating violations and complaints under CASL. The CRTC has the power to levy fines against non-compliant senders. Fines for a CASL violation can range up to $1 million dollars for individuals and $10 million dollars for “any other person” (which broadly includes corporations, societies, partnerships, ect). As well, these violations attract directors/officer’s liability, meaning company directors can be personally liable for these fines.

The first question is what exactly does CASL cover? That is not an easy question to answer given the number of exemptions. At this time, it does not include voice calls, faxes, etc. CASL does cover “spam”, but more broadly covers “commercial electronic messages”. This is defined in CASL as any electronic message that has the purpose of encouraging participation in commercial activities. A specific example is an electronic message that “offers to purchase, sell, barter or lease a product, goods, a service, land or an interest or right in land”, or offers in relation to a “business, gaming or investment opportunities”. CASL goes further and also includes any related advertising or promotion in the previous offers described, or promotes a person who does or intends to do any of the aforementioned.

Exceptions to commercial electronic messages include messages of a personal nature or where the sender has a family relationship with the person. Furthermore, there are a number of exceptions where the sender and receiver have an ongoing business relationship, or where a sender is responding to an inquiry regarding commercial or business services.

Senders of electronic commercial messages should ensure that express consent is properly documented in the event of a complaint. A key component of each commercial electronic message is that the sender must provide a working unsubscribe mechanism that works for at least 60 days, there is no cost to the receiver, and any requests must be processed without delay. But if a business does not have an existing business relationship or consent cannot be implied (or another exemption made out), then that business cannot attempt to solicit express consent by email. They would be limited to contacting the person by telephone, regular mail or some other means.

Again, one of the key reasons of having best practices, by documenting and ensure compliance, is that CASL contains a due diligence defense for violations. That is, a person must not be found liable for a violation under CASL if “they establish that they exercised due diligence to prevent the commission of the violation”. It is too early to tell how aggressive the CRTC will be in enforcing violations now that the CASL transition period has ended. Given the costly risk of each violation, it is safe to assume it would be money well invested to ensure an organization is CASL compliant.

[1] CASL’s full title is An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, SC 201, c. 23.

Property Transfer Tax

If you have purchased a home in the past, you have likely heard of the “Property Transfer Tax” in British Columbia. But what is it? How is it calculated?

In most situations, whenever there is a change to a property title, a property transfer tax will be charged by the provincial government. This includes acquiring an interest in a property, acquiring an additional registered interest in a property, or becoming a registered holder of a lease, life estate, or right to purchase the property.

The amount payable is based on the fair market value of the land and improvements (for example, buildings) on the date of registration. The tax is charged at a rate of:

  • 1% on the first $200,000
  • 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000 and
  • 3% on the portion of the fair market value greater than $2,000,000

For example, on a property transfer based on a fair market value of $600,000, the tax payable would be $10,000 – $2,000 would be payable on the first $200,000 and $8,000 would be payable on the balance of $400,000.

New rules that were instituted in 2016 provide that an additional 15% property transfer tax must be paid if the purchaser is a foreign entity or taxable trustee and the property is located in the Greater Vancouver Regional District. The writer will not go into further detail regarding the new tax in this blog.

What is the fair market value? The government has determined that this is the price that a willing purchaser would pay a willing seller (land and improvements) in the open market as of the date of registration. In most cases, the purchase price is considered the fair market value provided you register the property within a few months of the date of the sales contract. In the event you do not, you will have to verify that the purchase price does in fact still reflect the fair market value. There might be a difference between the purchase price and fair market value: if a) there was a significant change in the value; b) the condition of the property changed; or c) you did not purchase the property in the open market.

What if you purchase a property from in a non-open market transaction? How do you determine the fair market value then? One way is to obtain an independent appraisal. A second option is to look to the valuation provided by BC Assessment. Be careful how you use the assessment though. The 2016 roll value actually reflects market conditions as at July 1st, 2015, so the assessed value may not accurately reflect the current fair market value of the property when the transfer takes place. You cannot be flippant when it comes to providing the “fair market value” on the property transfer tax return – the government has the right to audit and potentially serve you with a notice of assessment for additional taxes if you have not been forthright in the valuation.

Next blog: What are the exemptions for paying the property transfer tax?

Enforcement of Money Judgments Act

To the chagrin of creditors – and delight of debtors – the civil enforcement process to collect debts can be time consuming, complicated and expensive. Creditors may discover that their efforts result in either no recovery or losses for the creditor seeking to enforce a debt or money judgment. Judgment creditors have a variety of byzantine tools to assist them in collecting a money judgment, including garnishment, debtor examinations, using bailiffs to seize and sell personal property, or forcing the sale of a judgment debtor’s interest in land. The province of British Columbia is currently drafting a new civil enforcement legislation – Enforcement of Money Judgments Act – to overhaul this system.

By way of brief background, in 2005, the BC Law Institute authored a report entitled “Report on the Uniform Civil Enforcement of Money Judgments Acts” (the “BCLI Report”) [1]. The BCLI Report identified the policy rationales for an effective and just civil enforcement legal regime:

  • Just debts should be paid;
  • The law must balance this goal with protecting debtors and their dependents; and
  • Judgment creditors should provide for the orderly distribution of the judgment debtor’s estate. This would require any judgment creditors to share in the recovery on the basis of their judgments.

BCLI Report goes on to identify ways that the proposed legislation will attempt to modernize and streamline the process of enforcing money judgments in British Columbia. One of the proposed mechanisms is assigning an enforcement officer to the judgment creditor who will then direct enforcement actions against the debtor. This would remove the significant burden to make expensive and time consuming court applications for enforcement.

A second proposed method to modernize practices is to allow a judgment creditor to register a notice of judgment in the Personal Property Registry to allow a charge or interest in the judgment debtor’s present and after acquired personal property.

Effectively, this would permit the judgment creditor to become a secured creditor. It is foreseeable that this would then cause a myriad of priority issues between other secured creditors with charges or security. Any new legislation would need to account for the complex priority issues and balance rights between existing creditors, and previously secured creditors.

From June to July 2015, the province of British Columbia solicited public consultation from the public and other stakeholders to comment on the proposed legislation and BCLI Report [2]. However, it has been largely silent since then. We will need to wait and see how Enforcement of Money Judgments Act will affect the debtor-creditor landscape in British Columbia.

Cody Reedman is an associate lawyer at Peak Law Group. He has a general civil litigation practice as well as practicing in bankruptcy and insolvency, collections, employment and strata law.

[1] http://www.bcli.org/sites/default/files/Unif_Civil_Enf_Money_Judgments_Act_Rep.pdf
[2] http://www2.gov.bc.ca/gov/content/justice/about-bcs-justice-system/legislation-policy/closed-consultations/enforcement-of-money-judgments-act

Family Violence

BY KIRAN BRAR, MARCH 6, 2017

According to the statistics in the Canada Family Violence Report (2009), out of all victims accounted for in family violence, 87% are females; and the highest rates of harassment are in the age group between 25 – 34 years. Aboriginal people were three times more likely to be victims of family violence than were those who were non-Aboriginal.

What is Family Violence? According to the BC Family Law Act, family violence includes physical or sexual abuse of a family member, an attempt to physically or sexually abuse a family member, or psychological/emotional abuse. In the case of a child, it can be direct or indirect exposure to family violence. The financial exploitation of a family member is also considered as abuse.

Most of the victims of family violence do not disclose or report the incidents of violence to anyone. It is very difficult for a victim to walk out of an abusive relationship. The abused person may deny the violence, consider it to be normal, or they are blaming him or herself for the abuse. If and when the abused person tries to seek help, the friends and family may not be supportive. There are chances that the abused person may leave and return several times to the abusive relationship.

Many reasons can affect the decision of a victim to leave an abusive relationship. It can be low self-esteem, fear of the partner, financial dependence, blaming own self, trying to keep the family together, trying to help the partner on promises to change, family pressure or pressure from children, cultural factors, fear of court, or the stigma in society. Many victims may not want to walk out of the relationship because they still love their partners. Immigrant and refugee women often experience additional problems like insecurity in a new country, fear of deportation, language barriers, etc.

A harassing conduct by an abuser, including unwanted attention, threats or actions, which make the victim afraid of their safety, is a criminal offence in Canada. It includes contacting repeatedly- directly or indirectly, making phone calls and leaving threatening messages, stalking, threatening to destroy property or pets, or making rude or obscene gestures.

The common characteristics of abusers is their need to control others, displacing anger onto others, their unrealistic expectations of the spouse, lack of empathy towards the victim, substance abuse may be involved, previously experienced or witnessed violence, low self-esteem, the inability to trust people, excessively possessive or dependant on victim, or being extremely jealous. The abusers often try to justify their actions by denial or trying to minimize blame when confronted.

The children involved in these situations have a long term impact on them, whether the abuse is direct or indirect. The children can have behavioural, emotional, physical, cognitive or social impacts on them. Section 37 of the BC Family Law Act includes as a part of the best interests of child determination, the impact of family violence on a child’s safety, security or well-being. It is also determination of the capacity of the abuser to appropriately care for the child and other safety risks while determining parenting arrangements.

The victims of abuse must make a safety plan for their own protection as well as the protection of their loved ones. The plan should include what to do and where to meet in case the victim and the children have to leave in a hurry; and emergency bag; photocopies of important documents; some money; extra set of keys etc. The victims should keep a diary and records of all the abuse and harassment. If the harassment or abuse continues, the police should be informed.

The victims can restrict the contact by the abuser by seeking court orders available in various forms, such as probation orders, conditional sentence order, restraining order or peace bond. These orders are pronounced when criminal charges are laid against the abuser.

A victim or any other family member on behalf of the victim can apply for protection orders under the Family Law Act. These orders specifically address safety concerns due to family violence. It is an effort to prevent family violence, and can be enforced criminally under the Criminal Code of Canada. There can be conditions on the use of alcohol or drugs, possession of firearms or a requirement to report to a probation officer or police. The court can also order the abuser to attend counselling sessions and programs.

If you or your children or any other family member is witnessing family violence in any form, you need to identify its impacts and contact a support person for help. The support person can be a lawyer. Our firm offers a free initial half hour consult, where we can guide you to your available options.

How do you plan for the future of a disabled child?

How do you plan for the future of a disabled child? There is a significant challenge with respect to estate planning for the benefit of dependents who are disabled. Leaving assets directly to them could adversely affect their eligibility for disability benefits and extended medical coverage.

A key factor is knowing your child – you must make an attempt at estimating the financial requirements by considering the following – where will the child reside on your passing? How much day-to-day support will they need? Will they ever be able to work?

It’s also imperative that you become familiar with the government programs and benefits available for a dependent child – both provincially and federally.

Having this knowledge at hand, you can then begin to plan how to structure the inheritance for this child or children. One of the most common ways is by way of a “TRUST”.

A trust is a legally binding agreement whereby a “settlor” transfers control to a “trustee” in order to manage and administer assets. Assets can include money, property and other possessions.

There are basically two types of trusts: a) discretionary and b) non-discretionary.

If you are the beneficiary of a discretionary trust, you have no control over the assets held in the trust. It is at the sole discretion of the trustee as to how funds are to be paid – whether they are paid directly to the beneficiary, or whether the funds are spent on behalf of the beneficiary, such as for medical aids, caregiver services, education, or even renovations to a property. There is no limit to the amount of assets you can place in this type of trust, therefore, it is imperative to appoint a trustee who knows the disabled child well and who understands and supports that child’s needs and lifestyle.

With a non-discretionary trust, the beneficiary either has some control as to how funds or assets are paid, or it may be that the Trustee is given explicit direction as to how much is paid out to the beneficiary at any given time. In the case of a non-discretionary trust, the asset cannot exceed $100,000 without affecting disability benefits.

Whether you have a discretionary or non-discretionary trust, any payments made to a beneficiary who is receiving disability assistance, will be deemed “unearned income” and this could result in a reduction of benefits to the beneficiary or outright disqualification. Depending on the amount paid to the beneficiary, the beneficiary may have a reduction for a month or several months and/or the beneficiary may have to apply again to qualify for the benefits.

A trust may be set up in a few different ways: a) inter vivos or b) testamentary. An inter vivos trust is created when the person establishing the trust (the settlor) is still alive. A testamentary trust is created through a person’s Last Will and Testament.

Should one look at an inter vivos trust or testamentary trust? There are a number of factors that play a part in that determination: what is the nature of the disability? What are the needs of the disabled beneficiary? What is the amount of the trust?

If this is something you would like to explore further, call to make an appointment.

Strata Foreclosures

In bad times – and sometimes in good times – strata owners fall behind on their monthly strata maintenance fees and these fees begin to pile up. Other times, special levies are costlier than owners can endure and go unpaid.

Strata corporations are not without recourse and have powerful collection tools at their disposal. Under Section 116 of the Strata Property Act (“SPA”), strata corporations can register a lien against the strata lot in a Form G Certificate of Lien. These are commonly known as strata liens.

The following can be included in a strata lien: strata maintenance fees, special levies, interest up to 10 per cent (permitted by the strata’s bylaws or included as a special levy), the costs of filing a lien, the reasonable legal and administrative costs for filing the lien, and the cost of removing the lien.

Under Section 112 of the SPA, the strata corporation must make a written demand to the owner providing them with at least two (2) weeks to pay the outstanding arrears as well as state that a strata lien may be registered if payment is not received within that period.

After filing a strata lien – and if the strata owner refuses or neglects to pay the outstanding strata arrears – the strata corporation has the power under Section 117 of the SPA to escalate the matter by a court ordered forced sale of the strata lot.

It is important to note that strata corporations should register a Form G Certificate of Lien in a timely manner in order to preserve its priority ahead of any other creditors. Until a Form G Certificate of Lien is filed, strata corporations are vulnerable to an owner that makes an assignment into bankruptcy or proposal under the Bankruptcy and Insolvency Act (“BIA”). Upon a bankruptcy or proposal under the BIA, there is an automatic stay of proceedings that prevents a strata corporation from taking any further execution steps against an owner with strata arrears. That includes registering a Form G Certificate of Lien against the strata lot, which is an execution step. If this happens, the creditor strata corporation becomes an unsecured creditor in the bankruptcy or proposal and is forced to deal with the bankrupt owner in the insolvency process.

Forced sale applications proceed summarily by way of a Petition to the BC Supreme Court. Any registered charge holders on the strata lot are listed as a Respondent on the Petition. For example, this may include a mortgagor, any judgment creditors, and tax authorities with charges against the strata lot.

A residential mortgage enforcement (foreclosure) proceeding normally provides the debtor with a six (6) month redemption period to either repay or rehabilitate the mortgage in default. A forced sale typically only provides an owner with thirty (30) days to repay the entire outstanding strata arrears, including reasonable legal and administrative costs and the costs of removing the lien.

If an owner is unable to pay their strata fees or special levies, they are well advised to quickly seek legal advice, especially when a demand letter is received from the strata corporation or a forced sale process has been commenced.

Strata Corporations should ensure that outstanding strata fees or special levies are enforced in timely manner. Otherwise strata corporations may lose an effective and powerful collection tool at their disposal.

Cody Reedman is a litigation, collections, and insolvency lawyer at Peak Law Group. He regularly advises and acts for strata corporations in forced sale proceedings.

Whether you act for a strata corporation that is owed strata fees or special levies by an owner, or dealing with an owner with unpaid strata fees who has or is considering making use of the BIA feel free to contact Peak Law Group or visit our Strata Fees Collection Page online (https://www.beckerlawyers.ca/services/online-strata-fee-collection/)

Peak Law Group also acts and advises owners a facing enforcement or collection action by strata corporations for unpaid strata maintenance fees and special levies. Please contact our office to make an appointment with one of our lawyers to discuss your individual situation.

Tax Debtors

One of the purposes and policy goals of the Bankruptcy and Insolvency Act (“BIA”) is to allow an honest but misfortunate debtors to be released from his or her crushing debts and to once again become a contributing member of society. Debtors must be both honest and misfortunate. Section 173 of the BIA set out facts, which if proven, a court may refuse, suspend or grant a conditional discharge, rather than provide an absolute discharge from bankruptcy. However, a competing policy goal is to maintain the public confidence in the integrity of the insolvency system.

If a bankruptcy discharged is opposed, the Court will need to determine whether a bankrupt has been rehabilitated by the bankruptcy process and what manner, if any, their discharge should look like. In considering an application for a bankruptcy discharge, the Court will consider a variety of factors, including the bankrupt’s pre-bankruptcy conduct, any substantial tax debts, whether the bankrupt complied with his or her duties under the BIA, and any other relevant facts.

Although the Canada Revenue Agency (“CRA”) is an involuntary creditor in bankruptcy proceedings, it is one of the more aggressive and active creditors. Tax debts are dischargeable in a bankruptcy, but they receive special treatment from other unsecured creditors. CRA can and will oppose a discharge from bankruptcy on the basis of tax debt. In 2009, Parliament amended the BIA such that the Court is required pay specific attention to tax debtors. Under section 172.1 of the BIA, the Court must consider specific circumstances for tax debtors with $200,000 or more of personal income tax debt and that represents at least 75% of the tax debtors total unsecured proven claims in the bankruptcy as follows:

  • (a) the circumstances of the bankrupt at the time the personal income tax debt was incurred;
  • (b) the efforts, if any, made by the bankrupt to pay the personal income tax debt;
  • (c) whether the bankrupt made payments in respect of other debts while failing to make reasonable efforts to pay the personal income tax debt; and
  • (d) the bankrupt’s financial prospects for the future.

In practice, CRA can – and will – oppose a bankruptcy discharge where the tax debt is less than $200,000.

At the time of writing, the most recent case involving the discharge of a tax debtor is Yen Ngoc Tran (Re), 2016 YKSC 70, a decision of the Yukon Supreme Court. This matter was heard before Mr. Justice Gower. At the discharge hearing, Ms. Tran, the bankrupt, appeared on their own behalf, while the Department of Justice appeared on behalf of CRA, and the bankruptcy trustee also appeared.

The bankrupt was 52-years-old and she had owned and operated, as well as managed, several businesses in the Whitehorse and Yukon area. Ms. Tran’s tax debt comprised of $1,177,806.22, which was the result of audit whereby the bankrupt had substantial unreported income and unaccounted personal expenditures for the 2007, 2008 and 2009 tax years, which were summarized in the following chart:

Taxation Year Total taxable income reported Unaccounted for personal expenditures Unreported income Net worth discrepancy
2007 $34,759.00 $768,932.63 $1,181,726.27 $1,440,075.27
2008 $34,674.00 $476,373.39 $465,730.91 $465,990.44
2009 $14,939.00 $371,043.83 $413,254.19 $413,254.19

The tax debt represented 94% of Ms. Tran’s unsecured debts. The principal was $368,821.40 and interest and penalties composed $808,984.82. Ms. Tran did not appear to dispute the tax debt at the discharge hearing. In any event, section 153(8) of the Income Tax Act holds that an assessment is binding unless it is objected to or appealed.

At the discharge hearing, Justice Gower held that this was a tax driven bankruptcy and he applied s. 172.1 and reviewed the general principles and policy surrounding discharges from bankruptcy. Justice Gower looked to British Columbia cases for guidance for tax debtors seeking discharge from bankruptcy. Justice Gower noted that the British Columbia courts typically make an order as a condition of discharge that the bankrupt must pay between 20% to 70% of his or her tax debt, depending on the personal circumstances of the individual. Further, Justice Gower reviewed another principal that when a tax debtor’s debt is “virtually all tax-related, and the censure and deterrence should be considered, particularly if the debtor has ignored his or her income tax obligations for a long period of time”.

The Court was also advised that the bankrupt’s depression and a gambling addiction were factors contributing to the bankruptcy, which went to Ms. Tran’s rehabilitation. After reviewing the bankrupt’s individual circumstances with reference to section 172.1, Justice Gower concluded that the bankrupt had been living a lavish lifestyle while the tax debt was incurred. Justice Gower held that while the bankrupt’s current circumstances were bleak, she was only earning $827.15 per month, that her financial prospects for the future were good. Justice Gower also found that Ms. Tran had been deliberately under-employed for the last several years, which corresponded to the period when the tax debt was incurred.

As a result of the foregoing, Justice Gower ordered that the bankrupt be discharged on conditions, including:

  • payment by the bankrupt of $235,000 (representing 20% of the tax debt) to her estate for the general benefit of her creditors;
  • the bankrupt was required to make payments of $200 per month with the ability to make lump sum payments at no penalty;
  • the bankrupt must attend a professional assessment for her gambling addition and participate in any recommended treatment or counselling to the Trustee’s satisfaction; and
  • until the bankrupt is absolutely discharged, the bankrupt is required to file her income tax returns.

Upon satisfaction of these conditions the bankrupt would receive an absolute discharge from bankruptcy.