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The Bankrupt had unsecured liabilities of about $149,000 and an estimated net realizable dollar value of $0 in the way of unsecured assets. She assigned herself into bankruptcy on May 14, 2013, after making a consumer proposal that was not accepted. She was automatically discharged from bankruptcy on February 15, 2014. 

Following her discharge from bankruptcy, the Bankrupt realized that she could apply for a disability tax credit—available under s. 118.3 of the Income Tax Act—on behalf of her disabled child for taxation years going back to the time her child was four years old. Accordingly, she re-filed her personal income tax returns for the years 2004 through 2014 and claimed those credits. Canada Revenue Agency (“CRA”) sent the refund to the Bankrupt’s former trustee, who received two cheques totalling $20,339.82. The refund included $1,260.12 for her pre-bankruptcy period in 2013 and $1,619.24 for her post-bankruptcy period in 2013. All other amounts preceded her bankruptcy, going back seven years in total.

The trustee was unaware, during the bankruptcy, that the Bankrupt had a disabled child. No consideration was given to applying for the disability tax refund before she was discharged. The Trustee applied for directions from the Court as to how the refunded amounts should be dealt with.

The provisions of the Bankruptcy and Insolvency Act (the “BIA“) that address the question of how an income tax refund from a disability tax credit is to be dealt with are ss. 67 and 68. Section 67 deals with the “property” of the bankrupt, and that property is divisible among the bankrupt’s creditors by the trustee. Section 68 addresses “surplus income”, which recognizes that the bankrupt must continue to pay basic living expenses during the bankruptcy from her income while making financial contributions to the bankrupt estate where there is “surplus income” to do so. These sections have been amended several times, so the Court stressed the importance of reading the decisions in which these sections are discussed in the context of the wording of the sections as they existed at the relevant time. The “relevant time” is the date the assignment into bankruptcy was made.

Section 67 of the BIA—as it now reads—specifically limits its application to refunds obtained within the year when the assignment is made, both pre- and post-bankruptcy. Not every refund is part of the “property” of the bankrupt and divisible against her creditors—only the amount owing to the bankrupt in respect of the calendar year of the bankruptcy. Refunds relating to prior years are not included in s. 67. Section 68 defines “total income” as being a bankrupt’s revenues “that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge”.
 
In this case, the “income” was largely not earned between the date of the bankruptcy and the date of the discharge, and none of the money was received during that period. On its face, section 68 had no application except for the money that was “earned” between the date of the bankruptcy and the date of the Bankrupt’s discharge. The rest of the money was not “earned” then and it was not “received” until long after the Bankrupt was discharged. 

The most recent amendments to sections 67 and 68 were intended to clarify the treatment of tax refunds as “property” and “income”. The express statement that only certain tax refunds were to be included in “property” in section 67, and only certain tax refunds were to be included in “income” in section 68 made it clear that other tax refunds were not to be included in either section. It is appropriate to presume that Parliament’s silence with respect to such other tax refunds was deliberate.

Since the tax refund was not claimed until after the Bankrupt had been discharged, she need only account for the portion that was “earned” during the bankruptcy. If the entire refund had been “received” during the bankruptcy, the Court would have exercised its discretion to limit the amount included for the calculation of “surplus income” to the amount “earned” in the calendar year preceding the bankruptcy, by reducing the amount payable to reflect the disability tax credit for pre-bankruptcy years other than the immediately preceding year. In other words, without detailed evidence of the decline in the Bankrupt’s financial fortunes, the Court would have concluded that her financial straits became beyond her control in the calendar year preceding the year of the bankruptcy, and only the tax refund for that one year prior period would be made available to the creditors. The amounts “earned” in the previous years would be payable to the Bankrupt.

Accordingly, the Court ordered that the funds held by the trustee be paid to the Bankrupt, with the exception of the funds that were received from CRA on account of the calendar year 2013 and in respect of her earnings up to the date of her discharge on February 15, 2014. Those amounts were to be treated as part of the Bankrupt’s “income”. 

Counsel: Susan Robinson Burns, Q.C. of Miles Davison LLP, Amicus Curiae, appointed by the Court and Craig McMahon of Milne Pritchard Law Office for the Intervenor, Alberta Association of Insolvency and Restructuring Professionals