An individual became bankrupt in 2003. Returns for the pre-bankruptcy and post-bankruptcy periods were filed, and assessed in 2004. In 2005, the Court approved a consumer proposal under ss. 66.11 et seq. of the Bankruptcy and Insolvency Act (the "BIA") - made by the individual, which had the effect of cancelling the bankruptcy. During the 2002 to 2005 period, the individual incurred annual tuition fees for which credits under s. 118.5 were not claimed, so that for 2006, there were unused tuition tax credit amounts under s. 118.61.
Can these unused tuition tax credits be claimed in 2006? The Directorate stated:
Where a bankrupt individual files a consumer proposal, section 66.4(2) of the BIA provides, among other things, that the approval or deemed approval by the court of the consumer proposal operates to annul the bankruptcy and to revest the property of the individual, unless the terms of the consumer proposal otherwise provide. … [T]he discharge from bankruptcy is not retroactive to the time the individual was declared bankrupt but … is effective from the date the proposal is approved by the court. … Although section 128 does not recognize proposals filed under the BIA, the discharge from bankruptcy [in] 2005 does not invalidate the filing and assessment of pre- and post-bankruptcy tax returns made prior to the date of discharge. …
[T]he individual was bankrupt in the 2003 … 2004 … and the 2005 taxation year[s]. For each of those taxation years, he was unable to claim the tuition tax credit under section 118.5. Furthermore, under clause 128(2)(f)(iv)(C), the unused portion of his tuition tax credits was not deductible. Since the approval of the proposal by the Court and the discharge of the individual's bankruptcy does not amount to an unconditional discharge under paragraph 128(2)(g) … we do not believe that this paragraph deems the unused portion of his tuition tax credits to be nil. Consequently, the individual may carry forward the unused portion of his or her tuition tax credits at the end of the 2005 taxation year … to the 2006 taxation year pursuant to section 118.61.