REFERENCE: E2009-034950 1
DOCUMENT TYPE: Interpretation - internal
DATE: 2010-08-16
AUTHOR: Frank, Lindsay
SUBJECT: Misdirected Post-Bankruptcy Refunds
HAA: No paper record.
August 16, 2010
Individual Returns Directorate HEADQUARTERS Processing Division Income Tax Rulings Directorate T1/T3 Accounting Enquiries Section Lindsay Frank (613) 948-2227 Attention: Brian Caldwell
2009-034950
Misdirected Post-Bankruptcy Refunds
This is in reply to an email from Valorie Bunce. At issue is whether the CRA is obliged to re-issue a misdirected refund cheque to a trustee in bankruptcy, and the appropriateness of the practice of enforcing recovery of a pre-bankruptcy refund through the tax system.
In this instance a post-bankruptcy refund issued in the calendar year of the bankruptcy was misdirected to the bankrupt. The bankruptcy arose on or after July 7, 2008. The trustee has contacted the CRA and asked for the refund.
For bankruptcies occurring on or after July 7, 2008, income tax refunds for the pre- and post-bankruptcy periods for the calendar year of the bankruptcy vest in the trustee, see paragraph 67(1)(c) of the Bankruptcy and Insolvency Act ("BIA"). Under paragraph 128(2)(a) of the Income Tax Act (the "Act"), the trustee is the agent of the bankrupt for all purposes of the Act. The provisions of the BIA bind the CRA, see section 4.1 of the BIA. In light of the foregoing, the CRA is obliged to re-issue the refund and send the cheque to the trustee.
Where a pre-bankruptcy refund cheque has been erroneously issued to the bankrupt instead of the trustee, the practice is to re-issue the refund and send the cheque to the trustee. In such circumstances, the policy provides that the bankrupt taxpayer's account is charged with the amount of the refund, and the bankrupt is asked to return the refund.
In the absence of a voluntary reimbursement by the taxpayer, the amount of a misdirected pre-bankruptcy or post-bankruptcy refund can only be enforced by a civil action in the Federal Court. As a result, the practice of posting the amount to the taxpayer's account is incorrect. The amount is not a tax debt, but rather a recoverable amount. Once the Crown has received judgment the liability can be posted, possibly to a sundry account.
Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided above.
Yours truly,
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
c.c. Valorie Bunce
T1/T3 Accounting Enquiries Section
Processing Division
Individual Returns Directorate