Principal Issues: [TaxInterpretations translation]
Can losses incurred prior to the discharge of a bankrupt be deducted by the trustee under 128(2)(e)(ii)(B) of the Act after the discharge of the bankrupt notwithstanding 128(2)(g) because of 128(2)(h)?
Position:
No.
Reasons:
Subparagraph 128(2)(g)(i) specifically provides that pre-discharge losses of an individual are not deductible in computing taxable income for a taxation year ending after the discharge, notwithstanding subparagraphs 128(2)(e)(ii) and 128(2)(f)(iii). Paragraph 128(2)(h) does not change this treatment since it applies only to taxation years beginning after the release. Furthermore, it does not provide that the individual's discharge be disregarded.
June 2, 2000
L'Outaouais Tax Services Office Headquarters
Patrick Massicotte
Validation and Enforcement Division
(613) 957-9232
Attention: Mr. Denis Leblanc
Service Office 2000-001608
Request for Technical Interpretation: Paragraphs 128(2)(e), 128(2)(g) and 128(2)(h) of the Income Tax Act (“ITA” or “the Act”)
This is in reply to your letter of March 22, 2000, in which you requested our opinion on the above subject.
FACTS
You submitted the following situation to us:
1. An individual declared bankruptcy in XXXXXXXXXX;
2. The individual had unused net capital losses (NCL) at the time of his bankruptcy;
3. The individual owned, at the time of his bankruptcy, shares and debts in private corporations, some of which were deducted as allowable business investment losses (ABIL) in the trustee's tax return for the year XXXXXXXXXX;
4. The ABILs exceeded other income on the trustee's tax return for XXXXXXXXXX, creating a non-capital loss (NCL);
5. The individual received an absolute discharge on XXXXXXXXXX;
6. Although the bankrupt was discharged, the trustee was not discharged and continued to deal with the bankrupt's assets and report his transactions on his tax returns as trustee.
QUESTION
Can the trustee deduct the losses described above in computing taxable income for the XXXXXXXXXX taxation year and subsequent years under paragraph 128(2)(e), considering the application of paragraphs 128(2)(g) and 128(2)(h)?
TRUSTEE'S COMMENTS
The trustee is of the view that the application of paragraphs 128(2)(e) and (h) permits the trustee to deduct the losses not used by the individual at the time of his bankruptcy as well as those incurred during the administration of the bankrupt's property, in accordance with the trustee’s mandate, even if the bankrupt had received an absolute discharge within the meaning of the Bankruptcy and Insolvency Act, despite the provisions of paragraph 128(2)(g). In other words, paragraph 128(2)(h) would have the effect of eliminating the restriction described in subparagraph 128(2)(g)(i) regarding the deductibility of the losses described therein under section 111.
YOUR COMMENTS
According to your analysis of paragraphs 128(2)(e), (g) and (h), the trustee cannot carry over losses incurred by the bankrupt to years ending after the bankrupt's discharge. In particular, you cite paragraph 128(2)(g), which provides, among other things, that, notwithstanding subparagraphs (e)(ii) and (f)(iii), where at any time an individual was discharged absolutely from bankruptcy, in computing the individual’s taxable income for any taxation year that ends after that time, no amount shall be deducted under section 111 in respect of losses for taxation years that ended before the discharge.
Accordingly, you submit that, under paragraph 128(2)(g), no carry-forward of losses incurred before the discharge may be made to taxation years ending after the bankrupt's discharge, despite the application of paragraph 128(2)(h).
OUR COMMENTS
Provision 128(2)(e)(ii)(B) provides that the trustee, in computing taxable income from the administration of the bankrupt's estate, may deduct under section 111 losses incurred by the bankrupt individual in respect of a loss for any taxation year that ended before the individual was discharged absolutely from bankruptcy. Parallel to this rule, subparagraph 128(2)(f)(iii) of the provides that the bankrupt must compute income on a separate return and that, in computing taxable income, no amount may be deducted under section 111.
When the bankrupt is discharged, subparagraph 128(2)(g)(i) effectively provides that, in computing the individual’s taxable income for any taxation year that ends after that time, no amount shall be deducted under section 111 in respect of losses for taxation years that ended before that time. Paragraph 128(2)(g) clearly provides that this rule applies to both the trustee and the bankrupt, notwithstanding subparagraphs 128(2)(e)(ii) and 128(2)(f)(iii), which concern the computation of taxable income by the trustee, on the one hand, and the bankrupt, on the other.
In the case you have submitted, this means that in computing taxable income for the XXXXXXXXXX taxation year, no amount may be deducted by the trustee or the bankrupt under section 111 in respect of a loss incurred in a taxation year ending before XXXXXXXXXX, i.e., all unused losses as at XXXXXXXXXX.
Furthermore, for the XXXXXXXXXX taxation year, since the individual was bankrupt at a particular time during the calendar year, the trustee must, on behalf of the individual, file a return indicating the income computed pursuant to paragraph 128(2)(e), subject to paragraph 128(2)(g). Similarly, the bankrupt must file a separate income tax return under paragraph 128(2)(f) for the taxation year XXXXXXXXXX since he was bankrupt during that period.
Paragraph 128(2)(h) does not apply to the XXXXXXXXXX taxation year, since the deeming rules set out therein apply only to a taxation year commencing after an order of discharge has been granted in respect of the individual. Since the individual was discharged on XXXXXXXXXX, the paragraph would apply only for the taxation year beginning after that date, i.e., the XXXXXXXXXX taxation year and subsequent years.
Consequently, for the XXXXXXXXXX taxation year, no amount in respect of losses for the XXXXXXXXXX and preceding years may be deducted under section 111 by the trustee, on the one hand, or by the bankrupt, on the other hand, despite the fact that the trustee continues to administer the bankrupt's assets throughout the XXXXXXXXXX year, even after the bankrupt's discharge.
For subsequent taxation years, i.e., XXXXXXXXXX and following, where the individual is no longer bankrupt at any time during the year, paragraph 128(2)(h) provides that paragraphs (e), (f) and (g) will apply as if the individual had been bankrupt during the year while the trustee was still administering the bankrupt's assets.
The deeming rules in paragraph 128(2)(h) allow the preamble to paragraphs 128(2)(e) and (f) to be respected in order to make them applicable since, for taxation years beginning after the individual's discharge, the individual was not bankrupt at any particular time in the year.
We also note that paragraph 128(2)(h) does not provide that paragraphs 128(2)(e), (f) and (g) must apply as if the unconditional discharge had not been obtained by the individual. This is an event that cannot be set aside without a clear and specific indication to that effect in the Act.
We do not believe that the purpose of paragraph 128(2)(h) is to revive, in a subsequent year, losses that have otherwise expired.
Consequently, considering the current state of the Act, we share your opinion that no amount, in computing the taxable income of any taxation year ending after the unconditional discharge of an individual, may be deducted under section 111 in respect of losses incurred by the individual in taxation years ending before the individual’s discharge, both for trustees subject to the regime provided for in paragraph 128(2)(e) and for bankrupts subject to the regime provided for in paragraph 128(2)(f).
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. 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 Legislative Access Bank 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 that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments helpful. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Best regards,
Ghislain Martineau
Acting Manager
Business and Individuals Section
Business and Publications Division
Income Tax Rulings Directorate
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