Principal Issues: Whether a taxpayer who has filed a proposal under the BIA can request an adjustment to a taxation year.
Position: Yes.
Reasons: S. 128(2)(a) does not apply to a proposal under the BIA. In a proposal, section 71 of the BIA does not ordinarily apply, as the taxpayer's property does not usually vest in a trustee; if it does, it is only to the extent necessary to assure performance of the proposal.
July 7, 2010
St. John's Taxation Centre HEADQUARTERS Individual Returns and Compliance Division Income Tax Rulings Directorate Attention: Judy Moores Lindsay Frank Team Leader, Office Exam (613) 948-2227
2010-035880
Adjustment Requests from Insolvent Taxpayers
This is in reply to an email from Bill Meadus, who asked whether the position taken in technical interpretation document 2007-0246481A11E applies to proposals under the Bankruptcy and Insolvency Act ("BIA").
The aforementioned interpretation dealt with the issue of who is authorised to request an adjustment of a pre-bankruptcy taxation year. The position taken therein was that the combined effect of section 71 of the BIA and paragraph 128(2)(a) of the Income Tax Act (the "Act") makes a trustee the appropriate person to request such an adjustment. Under section 71 of the BIA, a bankrupt taxpayer ceases to have any capacity to deal with his or her property. Pursuant to paragraph 128(2)(a) of the Act, the trustee is deemed to be the agent of the bankrupt for all purposes under the Act.
This is not the case where the proceeding involves a proposal under the BIA. Bankruptcy and proposals are completely different vehicles that are available to an insolvent person. Section 128 of the Act makes specific reference to bankruptcy, and Parliament did not provide that reference should be made to other provisions of the BIA. Section 128 of the Act only applies to bankruptcy, see Marchessault v. R., [2008] 3 C.T.C. 319 (F.C.A.), rev'g [2006] 5 C.T.C. 2481 (T.C.C.). Under a proposal, a trustee does not represent the creditors of the proponent in the same manner as in bankruptcy; rather, the trustee represents the creditors only to the extent necessary to assure performance of the proposal, see Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada, at 3-179 (Release 4-2009). Accordingly, taxpayers who have filed proposals under the BIA are not barred from requesting an adjustment of any taxation year.
Should you have any questions or require additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the telephone number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
c.c. Bill Meadus
Individual Returns and Compliance Division
St. John's Taxation Centre