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:
Total taxable income reported
Unaccounted for personal expenditures
Net worth discrepancy
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.