Principal Issues: [TaxInterpretations translation] (1) Where an individual's bankruptcy is changed to a proposal, is the individual considered not to have been bankrupt for the purposes of the Act? If so, can the unused tuition tax credits in the amount of $XXXXXXXXXX be claimed in 2006?
(2) If the pre-bankruptcy and post-bankruptcy returns are considered valid, can the individual use (carry-forward) the individual’s tuition tax credits before being discharged?
(3) In the situation under review, does the change in status from bankruptcy to proposal on XXXXXXXXXX 2005 have the same effect as an unconditional discharge? If so, can an unused tuition tax credit of $XXXXXXXXXX, which represents 2005 tuition fees, be granted to the individual in 2006?
Position: (1) 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 of the proposal by the court has the effect of discharging the bankruptcy and revesting the individual's property. The discharging of the bankruptcy is not retroactive to the time the individual is declared bankrupt; the discharge is effective from the date of the court's approval of the proposal.
(2) and (3) The individual may carry forward the unused portion of the tuition tax credits in the amount of $XXXXXXXXXX to the 2006 taxation year.
Reasons: (1) Court interpretation of the effect of the discharge of a bankruptcy in the context of proposals.
(2) and (3) For any taxation year in which an individual was bankrupt, the individual may deduct under subparagraph 128(2)(f)(iv) in computing tax payable the tuition tax credit under section 118.5. If the tax credit is not claimed, clause 128(2)(f)(iv)(C) provides that no amount in computing the individual's tax payable is deductible under section 118.61 for the unused portion of the tuition tax credits. In the situation under review, the individual was bankrupt in the 2003 taxation year (i.e., the taxation year that began on XXXXXXXX 2003 and ended on XXXXXXXX 2003), the 2004 taxation year and the 2005 taxation year and did not claim the tuition tax credit under section 118.5. Furthermore, since the approval of the proposal by the Court and the discharge of the individual's bankruptcy on XXXXXXXXXX 2005 does not amount to an unconditional discharge under paragraph 128(2)(g) of the BIA, we do not believe that this paragraph deems the unused portion of his tuition tax credits to be nil.
June 7, 2010
XXXXXXXXXX Tax Services Office Income Tax Rulings Directorate Individuals and Benefits Division, Business and Partnerships Division XXXXXXXXXX Attention: XXXXXXXXXX Danielle Bouffard
2009-035103
Bankruptcy turned into a proposal
This memo is in response to your email dated December 11, 2009 in which you requested our commentary regarding the unused portion of tuition tax credits by an individual when a personal bankruptcy was changed to a proposal. We have taken into account the additional information that you provided us by e-mail on May 3, 2010 and during telephone conversations (Duchesne/Bouffard).
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You submitted the following facts to us:
An individual became bankrupt on XXXXXXXXXX 2003. A pre-bankruptcy return for the pre-bankruptcy period, XXXXXXXXXX to XXXXXXXXXX 2003, and a post-bankruptcy return, for XXXXXXXXXX to XXXXXXXXXX 2003, were filed. These were assessed in XXXXXXXXXX 2004. On XXXXXXXXXX 2005, the Court approved a consumer proposal - referred to in sections 66.11 et seq. of the Bankruptcy and Insolvency Act (hereinafter the "BIA") - made by the individual, which had the effect of cancelling the bankruptcy.
During the period from XXXXXXXX 2002 to XXXXXXXXXX 2005, the individual incurred annual tuition fees of $XXXXXXXXXX for which the individual did not claim the tuition tax credit under section 118.5. As of XXXXXXXXXX 2006, this individual therefore had an unused tuition tax credit amount of $XXXXXXXXXX computed pursuant to section 118.61.
Based on your comments, since the pre-bankruptcy and post-bankruptcy returns were filed before the individual filed a proposal, you are of the view that they are valid. In addition, during a bankruptcy, you understand that unused tuition fees cannot be carried forward to a year after the bankruptcy unless the individual is discharged in a previous or current year. However, in the case of a bankruptcy proposal, there is no such rule.
We have reproduced your questions as you posed them:
1. Where an individual's bankruptcy is changed to a proposal, is the individual considered not to have been bankrupt for the purposes of the Act? If so, can the unused tuition tax credits in the amount of $XXXXXXXXXX be claimed in 2006?
2. If the pre-bankruptcy and post-bankruptcy returns are considered valid, can the individual use (carry-forward) the individual’s tuition tax credits before being discharged?
3. In the situation under review, does the change in status from bankruptcy to proposal on XXXXXXXXXX 2005 have the same effect as an unconditional discharge? If so, can an unused tuition tax credit of $XXXXXXXXXX, which represents 2005 tuition fees, be granted to the individual in 2006?
Our Comments
Section 128 provides special rules for bankrupt corporations and individuals. In particular, where an individual is bankrupt, paragraph 128(2)(d) provides that a taxation year of the individual is deemed to have begun at the beginning of the day on which the individual becomes bankrupt and the individual's last taxation year that began before that day is deemed to have ended immediately before that day.
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. Taking into account the comments expressed in the Med Finance Co. S.A. v. Bank of Montreal, 1993 22 C.B.R. 3rd 279 (B.C. C.A.) and MacGillivray v. The Queen, [1997] G.S.T.C. 12 (T.C.C.), we are of the view that the discharge from bankruptcy is not retroactive to the time the individual was declared bankrupt but that the discharge is effective from the date the proposal is approved by the court. Based on the facts submitted, we have assumed that the date of Court approval was XXXXXXXXXX 2005 and that the discharge from bankruptcy took effect only from that date. Although section 128 does not recognize proposals filed under the BIA, the discharge from bankruptcy on XXXXXXXXXX 2005 does not invalidate the filing and assessment of pre- and post-bankruptcy tax returns made prior to the date of discharge.
Paragraph 128(2)(f) requires an individual to file a separate return of the individual’s income for any taxation year during which the individual was a bankrupt. In computing the individual’s tax payable, the individual may claim the tuition tax credit under section 118.5. If the individual does not claim the tuition tax credit, clause 128(2)(f)(iv)(C) provides that the unused portion of the tuition tax credits under section 118.61 is not deductible in computing the individual's tax payable. Furthermore, subparagraph 128(2)(g)(iii) provides that where an individual was discharged absolutely, the individual’s unused tuition and education tax credits at the end of the last taxation year that ended before the discharge is deemed to be nil.
In the situation under review, the individual was bankrupt in the 2003 taxation year (i.e., the year that began on XXXXXXXX 2003 and ended on XXXXXXXX 2003), the 2004 taxation year, and the 2005 taxation year. 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) of the BIA [sic], 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, being $XXXXXXXXXX, to the 2006 taxation year pursuant to section 118.61.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.