If a CRA auditor wrongly assesses you for $850,000 of tax, interest and penalty because the auditor refused to recognize your temporary employment agency's employee expenses, and, instead of filing an objection with the CRA, you file an assignment in bankruptcy, can you challenge the CRA's wrong assessment through the bankruptcy process? No. The result will be that you will have higher debts than you should for your bankruptcy, possibly making it hard for you to get a discharge unless you pay an extra amount to the trustee for the creditors.
A trustee can challenge CRA's reassessment for you, by filing or pursuing an objection on your behalf. But usually the trustee will not take those steps because the assets in your estate rarely justify the trustee's fees for pursuing the objection. So, if you start a bankruptcy with high tax debts, without having tried to reduce them through the objections process, the CRA's assessment will stand. That's what happened to Mrs. Baran.
This decision came from an appeal in the Superior Court of Ontario, from a decision of the Bankruptcy "Registrar" (usually a lower level court judge (in Ontario, the "Masters" fill this role.)) The Registrar had said (2013 ONSC 240) that the CRA's tax debt claim was unreliable. He said this despite the fact that the Bankruptcy and Insolvency Act, like the Income Tax Act (ITA), is federal law and the ITA says that an "assessment shall, subject to being varied or vacated on an objection or appeal ... be deemed to be valid and binding notwithstanding any error..." (ITA s. 152(7)) And he said this despite s. 12 of the Tax Court of Canada Act, which says that the Tax Court "has exclusive original jurisdiction to hear and determine references and appeals to the Court on matters arising under ... the Income Tax Act."
The Registrar also made a novel discharge order: He ordered a one-day suspension of Mrs. Baran's discharge. That was all. The Superior Court judge, DM Brown, reversed the Registrar's order saying:
"[15] These portions of the Registrar’s Reasons disclosed that he strongly doubted that any “real income tax debt” of the bankrupt existed and he strongly suggested, in paragraph 63 of his Reasons, that the burden fell on the CRA to prove the amount of the tax debt at the discharge hearing notwithstanding that the Trustee had accepted, as a proven unsecured claim, the amount claimed by CRA pursuant to notices of assessment in respect of which the bankrupt taxpayer had not proceeded with an appeal. With respect, by taking such an approach the Registrar ignored the clear principles laid down by the Court of Appeal in Re Norris and, by so doing, erred in law.
"[16] ... While BIA s. 172.1(4)(a) directs a court to take into account “the circumstances of the bankrupt at the time the personal income tax debt was incurred”, such an analysis cannot turn into an inquiry into the validity of an assessed tax debt, the proof of claim for which has been allowed by the trustee. Unfortunately, the Registrar’s analysis turned into such an inquiry, which was impermissible and constituted an error of law."
As Justice Brown explained it, Re Norris said "while it was open to a trustee to call for evidence to support a proof of claim filed by the CRA, the delivery of a notice of assessment would fully answer that request." (Para. 13.)
"[17] ... the Registrar’s ... one-day suspension of the discharge represented a disposition at odds with the overwhelming weight of the jurisprudence dealing with tax-driven bankruptcies and was the technical device used by the Registrar to accomplish his remedial objective. ... The Registrar’s granting of a one-day suspension only resulted, I conclude, from his erroneous operating premise that since the CRA had failed to prove its debt at the discharge hearing, he could for all intents and purposes ignore the Trustee’s allowance of the assessed tax debt and, instead, proceed on the basis that no personal income tax really was owing. Such an erroneous operating premise constituted both a palpable and overriding error of fact and the taking into consideration of an improper factor.
"[19] The survey of the case law filed by the appellant [i.e., the CRA] disclosed that in the last four years courts most usually impose, as a condition of discharge, payments in the range of 5% to 15% of the tax debt, with only two cases resulting in payments of 50% or more of the tax debt."
Despite this range, Justice Brown decided that Mrs. Baran should pay only 1% of the $850,000 total debt, because:
"[22] ... Her husband grosses about $50,000 a year. While Ms. Baran is young – 34 years old – and no doubt will work in the future, her present circumstances would only justify the imposition of a payment below the 4% low end of the general range found in the case law.
"[23] I conclude that requiring a payment of $8,000 (or 1% of the tax debt principal) as a condition of discharge would satisfy the policy objectives of BIA s. 172.1."
See Tatiana Baran (Re), (2013 ONSC DM Brown)
A trustee can challenge CRA's reassessment for you, by filing or pursuing an objection on your behalf. But usually the trustee will not take those steps because the assets in your estate rarely justify the trustee's fees for pursuing the objection. So, if you start a bankruptcy with high tax debts, without having tried to reduce them through the objections process, the CRA's assessment will stand. That's what happened to Mrs. Baran.
This decision came from an appeal in the Superior Court of Ontario, from a decision of the Bankruptcy "Registrar" (usually a lower level court judge (in Ontario, the "Masters" fill this role.)) The Registrar had said (2013 ONSC 240) that the CRA's tax debt claim was unreliable. He said this despite the fact that the Bankruptcy and Insolvency Act, like the Income Tax Act (ITA), is federal law and the ITA says that an "assessment shall, subject to being varied or vacated on an objection or appeal ... be deemed to be valid and binding notwithstanding any error..." (ITA s. 152(7)) And he said this despite s. 12 of the Tax Court of Canada Act, which says that the Tax Court "has exclusive original jurisdiction to hear and determine references and appeals to the Court on matters arising under ... the Income Tax Act."
The Registrar also made a novel discharge order: He ordered a one-day suspension of Mrs. Baran's discharge. That was all. The Superior Court judge, DM Brown, reversed the Registrar's order saying:
"[15] These portions of the Registrar’s Reasons disclosed that he strongly doubted that any “real income tax debt” of the bankrupt existed and he strongly suggested, in paragraph 63 of his Reasons, that the burden fell on the CRA to prove the amount of the tax debt at the discharge hearing notwithstanding that the Trustee had accepted, as a proven unsecured claim, the amount claimed by CRA pursuant to notices of assessment in respect of which the bankrupt taxpayer had not proceeded with an appeal. With respect, by taking such an approach the Registrar ignored the clear principles laid down by the Court of Appeal in Re Norris and, by so doing, erred in law.
"[16] ... While BIA s. 172.1(4)(a) directs a court to take into account “the circumstances of the bankrupt at the time the personal income tax debt was incurred”, such an analysis cannot turn into an inquiry into the validity of an assessed tax debt, the proof of claim for which has been allowed by the trustee. Unfortunately, the Registrar’s analysis turned into such an inquiry, which was impermissible and constituted an error of law."
As Justice Brown explained it, Re Norris said "while it was open to a trustee to call for evidence to support a proof of claim filed by the CRA, the delivery of a notice of assessment would fully answer that request." (Para. 13.)
"[17] ... the Registrar’s ... one-day suspension of the discharge represented a disposition at odds with the overwhelming weight of the jurisprudence dealing with tax-driven bankruptcies and was the technical device used by the Registrar to accomplish his remedial objective. ... The Registrar’s granting of a one-day suspension only resulted, I conclude, from his erroneous operating premise that since the CRA had failed to prove its debt at the discharge hearing, he could for all intents and purposes ignore the Trustee’s allowance of the assessed tax debt and, instead, proceed on the basis that no personal income tax really was owing. Such an erroneous operating premise constituted both a palpable and overriding error of fact and the taking into consideration of an improper factor.
"[19] The survey of the case law filed by the appellant [i.e., the CRA] disclosed that in the last four years courts most usually impose, as a condition of discharge, payments in the range of 5% to 15% of the tax debt, with only two cases resulting in payments of 50% or more of the tax debt."
Despite this range, Justice Brown decided that Mrs. Baran should pay only 1% of the $850,000 total debt, because:
"[22] ... Her husband grosses about $50,000 a year. While Ms. Baran is young – 34 years old – and no doubt will work in the future, her present circumstances would only justify the imposition of a payment below the 4% low end of the general range found in the case law.
"[23] I conclude that requiring a payment of $8,000 (or 1% of the tax debt principal) as a condition of discharge would satisfy the policy objectives of BIA s. 172.1."
See Tatiana Baran (Re), (2013 ONSC DM Brown)
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