16 January 1992 External T.I. 9131705 F - Annulment of Bankruptcy, Income Tax Effects

24(1)

Attention:  19(1)

January 16, 1992

Dear Sirs:

Re:  Annulment of Bankruptcy

This is in reply to your letter of November 11, 1991 requesting our views regarding the application of section 128 of the Income Tax Act (the Act) when there is an annulment of a bankruptcy under either subsection 61(1) or 181(2) of the Bankruptcy Act.

You describe the situation where a corporation which has been petitioned into bankruptcy files a proposal under section 50 of the Bankruptcy Act and that proposal is then accepted by the creditors. Under section 61 of that Act, the court approval of such a proposal annuls the bankruptcy and an order of absolute discharge is not required.

In your analysis, you suggest that paragraph 128(1)(g) of the Income Tax Act (the Act) would not apply to a corporation which has had its bankruptcy annulled because an order of discharge will not be issued. Based on your view that the annulment presupposes that the bankruptcy should not have taken place in the first place, you further suggest that paragraph 128(1)(d) of the Act would not apply either.

While we agree that section 128(1)(g) of the Act does not apply to the situation where an absolute order of discharge is not granted, it is our view that the annulment of a bankruptcy under either subsection 61(1) or 181(1) of the Bankruptcy Act is not retroactive. In our opinion the annulment does not invalidate the application of the rules in section 128 of the Act for the period prior to the annulment (i.e. the period commencing on the date the taxpayer became bankrupt and ending on the date the bankruptcy is annulled). Consequently, paragraph 128(1)(d) of the Act would be applicable to deem the corporation's fiscal period to end on the day immediately prior to the date of the assignment into bankruptcy and to deem a new fiscal period to have started on the date of the assignment into bankruptcy.

We trust this will be of assistance to you.

Yours truly,

J.A. Szeszyckifor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch