22 July 2010 Internal T.I. 2010-0356611I7 - Assessing an Undischarged Bankrupt

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether it is appropriate to assess an undischarged bankrupt for tax payable in a pre-bankruptcy taxation year.

Position: Yes.

Reasons: By subsections 69.3(1) and (1.1) of the BIA, leave of the court is not necessary to assess an undischarged bankrupt in respect of a pre-bankruptcy taxation year. The taxpayer is still bankrupt and has not been released from all provable claims.

		July 22, 2010

	Winnipeg Taxation Centre				HEADQUARTERS
	Individual and Benefit Services			Income Tax Rulings
	   Division	  							Directorate
									Lindsay Frank
	Attention: Monica Middleton				(613) 948-2227

Team Leader

									2010-035661

Assessing an Undischarged Bankrupt

This is in reply to an email from Cyndi Martin-Conway. At issue is whether a notice of assessment in respect of a pre-bankruptcy taxation year period could be issued to an undischarged bankrupt.

The facts are as follows. A taxpayer was adjudged bankrupt on XXXXXXXXXX . The trustee was discharged on XXXXXXXXXX , from administering the bankrupt estate, but the bankrupt was not discharged from bankruptcy. On XXXXXXXXXX , the taxpayer filed returns for the 1999 and 2000 taxation years, which were assessed tax payable on XXXXXXXXXX .

Subsection 69.3(1) of the Bankruptcy and Insolvency Act imposes a general stay of proceedings against the creditors of a bankrupt with a provable claim until the trustee has been discharged. However, subsection 69.3(1.1) provides that the stay ceases to apply once the trustee is discharged.

Subsection 121(1) defines "a provable claim" as generally any amounts owing at the time a taxpayer becomes bankrupt. In respect of a tax liability, such amount does not have to be assessed before the taxpayer's bankruptcy. A person's tax liability comes into existence as income is earned; the notice of assessment is at most a confirmation of its existence, see The Queen v. Simard-Beaudry Inc., 71 D.T.C. 5511 (F.C.T.D.).

In the instant case, an assessment of tax payable is a provable claim. However, the fact situation here is somewhat unusual. Normally a taxpayer would, by operation of subsection 178(2), be released from all provable claims upon discharge from bankruptcy. Given that the bankrupt has not been discharged, it follows that upon the discharge of the trustee, the stay of proceedings is lifted and the Minister can commence an action for the recovery of a provable claim, and the first step would be to issue the assessment.

Should you have any questions or require additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Cyndi Martin-Conway
Technical Advisor
Individual and Benefit Services Division
Winnipeg Taxation Centre