Category Archives: Bankruptcy and Insolvency Act

Release from Debt Obligation – Proposal in Bankruptcy

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Release from Debt Obligation – Proposal in Bankruptcy 

St-Hillaire v The Queen, 2014 TCC 336

[See also the decision in Gaumond v The Queen, 2014 TCC 339]

At issue was when a debt ceases to exist for purposes of the Allowable Business Investment Loss provisions of the Income Tax Act.

The court determined that for tax purposes, where a shareholder waives the right to liquidation dividends and this results in a termination of the debt under the terms of a proposal in bankruptcy, the debt ceases to exist at the time the proposal is accepted by the creditors.


The taxpayer claimed an Allowable Business Investment Loss (ABIL) on the basis of loans made to his wholly owned company that after a proposal in bankruptcy was accepted by the unsecured creditors of the company.  The CRA denied the loss, and subsequent carrying charges, because the taxpayer had waived his right to terminal dividends on the proposal being accepted, in their opinion cancelling the debt.

The corporation’s year end was October 31 of the year, and the corporation reported and paid tax on the gain on the disposition of the debt on its year-end return.


Paragraph 38(c) defines the taxpayer’s ABIL to be 1/2 of the taxpayers business investment loss for the year from the disposition of property, and paragraph 39(1)(c) defines what a taxpayers business investment loss for a year is.  In order for a debt to qualify for the ABIL provisions, the debt must be a bad debt as defined in subsection 50(1), which requires that the debt be “owing to the taxpayer at the end of a taxation year” (paragraph 50(1)(a)).

Where the taxpayer, whose taxation year ends on December 31 (ITA 249(1)), is not owed a debt at the end of the taxation year, there is no property the disposition of which could result in a loss as required by sections 38 and 39, as there is no debt that could become a bad debt pursuant to subsection 50(1).

The Bankruptcy and Insolvency Act does not expressly state when a debtor is released from the debt obligation where a proposal in bankruptcy is accepted by the creditors.  There are two theories as to the timing of the release:

  1. The time for the partial discharge of a debt, and partial release of a debtor, is when the trustee’s discharge order is issued or when the trustee issues a certificate that the proposal has been fully performed: Rita Congiu and 9100-7146 Québec Inc. v. The Queen, 2014 FCA 73, citing Rita Congiu c. L’Agence du Revenu du Québec, 2014 QCCA 242.
  2. The time for the partial discharge of a debt, and partial release of a debtor, is the date the court ratifies the proposal after it has been accepted by the creditors: Réal Martel v. Her Majesty the Queen, 2010 TCC 634Anderson v. Canadian Imperial Bank of Commerce (1999), 11 C.B.R. (4th) 157 (Ont SCJ).

The court noted that in addition to the results of the two approaches, the court must also consider the effect of the waiver of all liquidation dividends and the recognition of a gain by the corporation on the settler to the debt in its financial statements (para 38).   In this case, the waiver of the liquidation dividends resulted in the debt being written off under the terms of the proposal in bankruptcy and ceasing to exist.  This was in line with the corporation recognizing a gain in its year-end financial statements on the disposition of the debt on October 31, before the end of the year.

– Sas Ansari, JD LLM PhD (exp)

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Assessment, Validity & Collateral Attack – Sas Ansari

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What Circumstances Would Permit a Trustee in Bankruptcy to Look Behind a CRA Assessment upheld by the TCC and FCA so as to Disallow the CRA’s Claim for Tax Debt?

Re Jones, 2012 BCSC 1146

At issue was the question of whether a trustee in bankruptcy can go behind the deeming provisions of the ITA and judgments of the TCC and FCA enforcing a tax assessment so as to disallow CRA’s claim in bankruptcy proceedings.  Alternatively, whether the trustee in bankruptcy acted properly in rejecting the CRA’s tax claim on the basis that either (1) the merits claim was not determined at the criminal trial of the taxpayer due to evidence not being admissible due to Charter breaches, or (2) if the merits were determined they are wanting due to Charter breaches.

The TCC held that the “miscarriage of justice” exception allowing the trustee in bankruptcy to look behind the judgement of the TCC and FCA is very narrow, and is only based on the rationale of potentially determining the existence of a debt based on the desire to achieve fairness for other creditors of the debtor. The only manner of challenging the CRA’s assessment is by using the provisions of the ITA. No collateral attacks will be permitted.


The CRA assessed the Taxpayer on the basis of unreported income from the sale of marijuana using the net worth basis.

At a criminal trial wiretap evidence and consequential evidence obtained during a search were ruled inadmissible due to breaches of Charter rights, and the charges were stayed. The CRA’s assessment was certified as a judgement of the Federal Court pursuant to s 223(3) of the ITA, and this has never been set aside.

The taxpayer made an assignment in  bankruptcy and cited the tax assessment as the reason.


The FCTD had commented, on judicial review of the MNR’s decision not to grant the request for an extension of time to file a Notice of Objection (2002 FCA 90), and the court there addressed the argument that ” the 1988 assessment was based on information that was held in a criminal proceeding to have been obtained in breach of Mr. Jones’ Charter rights, and that this, therefore, warranted quashing the assessment”. pursuant to R. v. O’Neill Motors Limited, 1998 D.T.C. 6424 (F.C.A.).

The Crown argued that the ITA deems an assessment to be valid absent a taxpayer taking the proper actions to vacate the assessment.  The taxpayer could not use bankruptcy proceedings to launch a collateral attack on the assessment.

The Court recognized that subsection 152(8) deems an assessment to be valid and binding, subject to an objection or appeal under the ITA.  Here, the taxpayer had failed to follow the mandated procedure.

The Trustee argued that the Crown like other creditors is subject to the provisions of the Bankruptcy and Insolvency Act, which requires every creditor to prove his claim and ” further requires that every proof of claim include a statement of account showing particulars of the claim and any counterclaim the bankrupt may have:  BIA ss. 4.1, 124″.  The trustee then examines every proof of claim and may disallow it in whole or part.

The Court referred to the decision in Re Carnat where it was stated that where the trustee in bankruptcy was challenging the validity of a CRA claim, it must follow the provisions of the ITA, rather than asking the bankruptcy court to determine the matter on its merits.  Also, the trustee cannot himself determine tax liability question on the merits.

The Court held that it didn’t matter that the TCC and FCA, in this case, did not consider the merits of the taxpayer’s argument. It was within their jurisdiction to determine whether the Charter arguments were available to the taxpayer, and determined that they were not.  The trustee argued that it had a right and duty to look behind those judgements to see whether there is good reason, such as fraud, collusion or a miscarriage of justice to conclude that there should not have been a judgement or assessment on the basis of the ” reasons of Lord Justice Buckley in Re Van Laun Ex Parte Chatterton, [1907] 2 K.B. 23 (C.A.) as cited by Mr. Justice Burnyeat in Canada Asian Centre Developments Inc. (Re), 2003 BCSC 41, at para. 24:

Whether the creditor alleges that there has resulted, and that he relies upon an account stated, or a covenant entered into by the debtor, or a judgment which he has obtained, the principle, I apprehend, is exactly the same, and is this — that the trustee is not the person who has stated the account, is not the covenantor, is not the judgment debtor, but is entitled to say, “it is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate.”  If there be a judgment it is not necessary to show fraud or collusion.  It is sufficient, in the language of Lord Esher, to shew miscarriage of justice — that is to say, that for some good reason there ought not to have been a judgment.

The Court said that the decision above does not stand for the proposition that a decision reached on the basis of a limitation period gives the trustee the power to look behind the judgment to determine that there has been a miscarriage of justice.

The Court further referred to the decision in Transglobal Communications Group Inc. (Re), 2009 ABQB 195, where the ABQB held that the trustee could not disregard the judgements of courts, but had to recognize existing judgements even though appeals on those judgements were extant.

The Court stated that:

It appears to me from the authorities that the courts do not want to foreclose the possibility that in some rare circumstance there may be a “miscarriage of justice” exception, which is in addition to the fraud or collusion exception to the general proposition that a trustee should be satisfied that a claim is legitimate if it is confirmed by a judgment of a court of competent jurisdiction.  However, the trustee has been unable to illustrate any examples parallel to the facts here.

The “miscarriage of justice” exception is very narrow and is based on the rationale of potentially determining the existence of a debt based on the desire to achieve fairness for other creditors of the debtor. In this case, there were no other creditors.

A trustee cannot launch a collateral attack on the assessment of the TCC judgement.  Here, the taxpayer was assessed by the CRA and has exhausted all avenues of appealing that assessment under the iTA. The assessment was not set aside by the TCC or the FCA, and has been certified by the FC as a judgement of that court.  The trustee was, therefore, wrong to disallow the proof of the claim based on his own assessment of a Charter-based defence that might have been available had the taxpayer taken different steps to challenge the assessment.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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