This decision of the Ontario Court of Appeal suggests that a taxpayer who plans to relieve a tax debt through bankruptcy should file a Tax Court appeal first in order to have CRA’s claim treated as a contingent liability so that the special rules favouring the Crown do not apply.
“[6] The issue, then, on this appeal is a narrow one: In calculating Mr. Schnier’s personal income tax debt under BIAs. 172.1(1), should the assessed amounts of personal income tax that were under appeal at the time of his discharge hearing be included?
[7] For the reasons set out below, I conclude the answer is “no”, and I would dismiss the appeal. Both the motion judge and the Registrar correctly concluded that until the Tax Court of Canada had disposed of Mr. Schnier’s appeals of the Canada Revenue Agency (“CRA”) assessments, the portion of the CRA’s claim for the assessed amounts under appeal was a contingent one that the trustee could refuse to admit as a proven claim. Accordingly, the motion judge and the Registrar correctly held that s. 172.1 of the BIA did not apply to Mr. Schnier’s discharge hearing.”
The decision seems to mean that anyone who plans to declare bankruptcy as a way of dealing with income tax debts (other than director’s liability) must file a Tax Court of Canada appeal first to avoid the BIA section 172.1 rules. If so, that sounds pretty serious for CRA and the efficacy of section 172.1. The court does address that concern somewhat by saying that the CRA could ask the BIA Registrar for an adjournment to allow the TCC appeal to finish [para. 66] but the Registrar’s willingness to grant an adjournment could easily depend on whether it was expected that the TCC case could be decided soon.
It also seems an important decision for the ETA (i.e., GST), given that it approves the reasoning of Re Port Chevrolet Oldsmobile Ltd., 2002 BCSC 1874(CanLII), 49 C.B.R. (4th) 127, aff’d 2004 BCCA 37 (CanLII), and Re 2713250 Canada Inc., 2011 QCCS 6119 (CanLII) (on the valuation of CRA claims under BIA s. 135(1.1) for purposes of votes of creditors):
“[61] Although the Re Port Chevrolet and Re 2713250 CanadaInc. cases both involved the exercise by trustees of their discretion in the context of admitting or rejecting proofs of claim for the purposes of voting under BIAs. 108(1), in my view the reasoning in Re Port Chevrolet, as adopted by Re 2713250 Canada Inc., applies equally to the exercise of the trustee’s general power to determine whether a contingent claim is a provable claim under ss. 121 and 135 of the BIA.”
Although the trustee still must exercise its discretion in appraising CRA’s claim, and there could be disputes about that discretion in extreme cases where a TCC appeal seems abusive, this decision suggests that generally trustees should value CRA claims at nil pending a final decision on objection and appeal. So, taxpayers should invest the time to plead their cases in a credible way to help support the trustee’s decision.
Nonetheless, the impact of the decision may not be very severe for CRA. First, prudent trustees might adjourn a vote on a proposal pending the outcome of objection and appeal. If the trustee does not do so, CRA could object to the Court’s approval of the proposal at which point the bankruptcy registrar could adjourn the vote until a Tax Court appeal is decided or the debtor abandons his or her appeal rights. Similarly, as the Court noted in Schnier, CRA could ask the Registrar to adjourn a decision on a bankruptcy discharge. (See para. 66.)
As well, in many tax-driven bankruptcies, without CRA’s claim, it will be hard for the debtor to show that he or she is an “insolvent person” at the time of making the proposal or filing the bankruptcy assignment. The definition of “insolvent person” requires, in part that the debtor be a person:
- (a) who is for any reason unable to meet his obligations as they generally become due,
- (b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or
- (c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;
First, for almost all Income Tax Act cases, CRA cannot collect the debt until all appeal rights have expired. (ITA s. 225.1 and see Schnier at paras. 45-50.) So, while an objection or Tax Court appeal is in process, a debtor may be unable to show that he could not pay his debts “as they generally become due”, given that absent CRA’s claim, the debtor often has no problem meeting his financial obligations.
This logic may not apply to CRA claims for HST debt, as those debts are collectible right away, after assessment. But if the trustee also rejects the CRA claim, that position may complicate the debtor’s ability to argue that he was an “insolvent person”.
So, if the trustee rules that CRA’s claim is only contingent and unquantifiable, CRA may be able to apply to the Court to challenge the proposal or bankruptcy or have it annulled on the basis that the debtor was not eligible to use the bankruptcy process because he or she was not an “insolvent person” as the BIA requires.
In the past, CRA could be the controlling creditor for a bankruptcy process. This decision may attenuate CRA’s power, for example by introducing delays, but not eliminate it.
Schnier v. Canada (Attorney General), 2016 ONCA 5 (DM Brown, Blair, Gillese)