Who Has Standing to File a Notice of Appeal for Pre-Bankruptcy Years of a Taxpayer?

Lawrence v The Queen, 2012 TCC 331

At issue was whether the Court ought to grant the Crown’s motion to dismiss the taxpayer’s appeal on the basis that the taxpayer has no standing to file a notice of objection for his pre-bankruptcy years.

The Court granted the Crown’s motion and dismissed the appeal, holding that a the Bankruptcy and Insolvency Act (BIA), section 71 in combination with the definition of “property”, passes and vests all rights of action to the trustee on the date of bankruptcy so that “the Appellant ceased to have the legal capacity to file a notice of objection concerning [his pre-bankruptcy taxation years]”.  Additionally, upon being discharged from bankruptcy, those pre-bankruptcy rights do not automatically revert to the taxpayer – reversion requires an application to have those specific rights assigned or evidence that the trustee had been discharged of those rights.

FACTS
The Taxpayer filed an assignment into bankruptcy in 2006, and was discharged from bankruptcy in 2008.  In 2011, the taxpayer asked the MNR to determine his eligibility for the Disability Tax Credit for the 2010 and earlier years.  The MNR determined that the taxpayer was eligible for the credit, and reassessed the post-bankruptcy (post 2006) tax years, applying the credit.  The NMR took the position that a request for reassessment for the pre-bankruptcy years could only be made by the trustee.

The taxpayer filed a notice of objection, which was not accepted, and then appealed.

ANALYSIS

The Court stated that section 71 of the BIA vests all property of the bankrupt in the trustee, and reads:

71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.

The Court then referred to the definition of “property” in the BIA which is very wide, encompassing the right to be an action.  The definition reads:

“property” means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or person­al, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property;

Therefore, the pre-assignment into bankruptcy rights, including rights of action, passed to and vested in the trustee, such that on bankruptcy the taxpayer no longer had the legal capacity to file a notice of objection for the preceding years.

The Court referred to MLA Northern Contracting Ltd. v. LeBrun (2007), 39 C.B.R. (5^th) 95 (S.C.J.), affirmed 2008 ONCA 339, in stating that the rights of the bankrupt do not automatically revert upon discharge from bankruptcy. In that case, Justice Plantana stated:

65     A discharged bankrupt has no right or entitlement to deal with his or her prior assets. The discharge of the Trustee and of the bankrupt does not have the automatic effect of reverting proprietary rights to the bankrupt. As noted in Solomon, “once property is vested in the trustee, it does not revert back to the bankrupt on discharge.”²⁵ There is no question that the claimed interest in question existed prior to the bankruptcy and that it was not claimed as part of the bankruptcy. I agree with the position that regardless of whether this was disclosed or not, LeBrun’s Claimed MLA Interests passed to, and vested with, the Trustee on the date of bankruptcy and there is no automatic reversion of that asset back to LeBrun.

In this case there was no evidence that the taxpayer has applied to have those rights assigned to him (Moffoot v. E. Sands & Associates Inc., 2011 BCSC 1167), or that the trustee has been discharged in relation to these rights.