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.

FACTS

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.

ANALYSIS

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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