Principal Issues: Whether the cashing by a discharged bankrupt of an original cheque, in addition to the duplicate cheque issued to replace it, constitutes an excessive refund, and if so, whether the amount is considered as a provable claim.
Position: No.
Reasons: For s. 160.1 to apply, a taxpayer must have claimed a refund that exceeded the amount to which that person was entitled. As the cheque was cashed post bankruptcy, it is not a provable claim, there being no pre-bankruptcy liability for the amount of the cheque.
January 29, 2010
Individual Returns and Payments HEADQUARTERS Processing Directorate Income Tax Rulings Processing Division Directorate Attention: Tanya Desjardins, Manager Lindsay Frank T1/T3 Accounting Enquiries and (613) 948-2227 Refund Set-Off Section 2009-033435
Excessive Refunds
This is in reply to an email from Valorie Bunce. At issue is whether cashing an original refund cheque, after being replaced by a duplicate, constitutes an excessive refund, and if so, whether it is considered a claim provable in bankruptcy.
The facts are as follows. On May 18, 1995, the taxpayer was issued a refund cheque ("original cheque") in the amount of $2,321.30 for the 1994 taxation year. He attested that he did not receive the refund, and as a result, a duplicate refund cheque ("duplicate cheque") was issued to replace the original cheque. On XXXXXXXXXX , the taxpayer was adjudged bankrupt. On XXXXXXXXXX , he received his absolute discharge from bankruptcy. On December 1, 2008, he cashed the original cheque. On February 24, 2009, the Canada Revenue Agency ("CRA") was advised that the original cheque had been cashed. On March 10, 2009, without assessment, the amount of the original refund cheque, plus interest from May 19, 1995, to that date was added to the taxpayer's balance owing.
Ms Bunce is of the view that since the original cheque was negotiated in the post-bankruptcy period, notwithstanding that the amount pertained to the pre-bankruptcy period, the amount cashed does not constitute a provable claim. Rather, pursuant to subsection 160.1(1) of the Income Tax Act (the "Act"), that amount is an excess amount payable in the post-bankruptcy period, and as a result, is not a provable claim.
The purpose of the duplicate cheque was to replace the original cheque. When it turns out that the taxpayer has cashed both cheques, the refund effectively gets paid twice. However, as explained below, the cashing of the original cheque does not constitute an excessive refund. It follows then that subsection 160.1(1) of the Act does not apply.
Where the Minister determines that an excessive refund has been made, subsection 160.1(1) of the Act provides that the excess amount is deemed to be payable by the taxpayer on the date that it is refunded. Further, the taxpayer is required to pay interest on that amount, at the prescribed rate, from the date that the excess amount was refunded until it is repaid.
Subsection 160.1(1) reads:
"Where at any time the Minister determines that an amount has been refunded to a taxpayer for a taxation year in excess of the amount to which the taxpayer was entitled as a refund under the Act, the following rules apply:
(a) the excess shall be deemed to be an amount that became payable by the taxpayer on the day on which the amount was refunded; and
(b) the taxpayer shall pay to the Receiver General interest at the prescribed rate on the excess ... from the day it became payable to the date of payment."
Under subsection 160.1(3) of the Act, a taxpayer may be assessed at any time for any amount payable under subsection 160.1(1). When such an assessment is raised, Division I applies, with any modifications that the circumstances require, as if it were made pursuant to section 152.
Subsection 160.1(3) reads:
"The Minister may at any time assess a taxpayer in respect of any amount payable by the taxpayer because of subsection (1) ... and this Division applies, with such modifications as the circumstances require, in respect of an assessment under this section as though it were made under section 152."
In Matte c. R., [2004] 1 C.T.C. 2823 (T.C.C.), the taxpayer erroneously claimed a federal dividend tax credit appearing on a T5 slip, as being an amount of tax withheld at source. Thinking that no tax had to be paid for the year, he claimed this amount as a tax refund for the 1999 taxation year. The initial assessment for that year was raised on May 11, 2000, without the error being caught. The notice of assessment showed no tax to be payable as a result of the erroneous withholdings claim.
Subsequently, the error was discovered. When the federal tax dividend tax credit was correctly applied, an overpayment for the 1999 taxation year no longer existed. Instead, the amount of the withholdings erroneously claimed became an amount in excess of the refund to which the taxpayer was entitled for the 1999 taxation year. On December 27, 2000, the taxpayer was assessed for that amount, pursuant to subsection 160.1(3).
Matte stands for the proposition that an excessive refund arises when a taxpayer claims an amount in excess of what that person is entitled. In the instant case, no excessive refund existed. Rather, the taxpayer defrauded the fisc by cashing the original cheque after declaring that he never received it, and after having received a replacement cheque.
XXXXXXXXXX For section 160.1 to apply, a taxpayer must have claimed a refund that exceeded the amount to which that person was entitled. Accordingly, in the instant case, the amount obtained as a result of cashing the original cheque cannot be considered to be an amount refunded in excess, within the meaning of subsection 160.1(1) of the Act. Nonetheless, his action does not affect the liability for the amount.
Barring a voluntary reimbursement by the taxpayer, the amount of the liability can only be enforced by a civil action in the Federal Court. As a result, the CRA's practice of charging a taxpayer's account with the proceeds of the original cheque with attendant interest is premature, and cannot be exercised until the Crown has received judgment.
Should the CRA succeed in a civil action against the taxpayer to recover the amount of the original cheque, that amount would not be considered to be a provable claim. Subsection 121(1) of the Bankruptcy and Insolvency Act defines a provable claim as a debt or liability, present or future, to which the bankrupt is subject on the date of bankruptcy, or before he has received an absolute discharge. The liability for that amount arose when the cheque was cashed which was long after the taxpayer had received his absolute discharge from bankruptcy. Consequently, it is an amount payable in full in the post-bankruptcy period.
Interest is chargeable on the amount, calculated and compounded monthly at the average bank rate plus 3 per cent, from the due date and ending before the day on which payment is received by the fisc, see Regulations Respecting Interest on Overdue Accounts and Administrative Charges for Dishonoured Instruments, SOR/96-188, in particular see section 6, which deals with interest on overpayments and erroneous payments.
Should you need clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.
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 and Refund Set-Off Section
Processing Division