In general, unpaid and to be paid disability tax credits can form part of a bankrupt’s estate in the form of property and income. If they are “property of the bankrupt” within the Bankruptcy and Insolvency Act, (the “BIA”), then they are 100% distributable amongst estate creditors in accordance with the priority scheme set out in the BIA. If they are “income” within the BIA, they are subject to contribution by the bankrupt pursuant to certain directives or as determined by the Court.
In Rafter (Re), 2018 NSSC 331, Ms. Rafter had gone through two assignments in bankruptcy (2005 and 2014) and subsequently, two absolute discharges. Prior to the second discharge, she applied for and was denied CPP disability benefits. A couple years after her second discharge, in 2018, she left the workforce on medical advice. Later the same year, she received tax advice and applied for disability tax credits, retroactive to 2010. The Canada Revenue Agency (“CRA””) issued a re-assessment and refund for the years 2010 to 2014.
The issue is whether disability tax credits which are attributable to a period prior to a bankruptcy, but which were paid after the bankrupt’s discharge, are property or income which in any way form part of the bankrupt’s estate or are subject to any claim by creditors.
The Registrar reviewed the wording of the BIA and the jurisprudence interpreting that provision to determine that the definition of “property of the bankrupt”, as it applied to tax refunds, only extended to refunds owed to the bankrupt “in respect of the calendar year . . . in which the bankrupt became a bankrupt”. As a consequence, only the pre-bankruptcy 2014 refund, being part of the “calendar year” of the bankrupt’s year of bankruptcy (and was a small portion of the refund) is “property of the bankrupt” within the BIA.
On the question of whether the payments received constituted income, the Registrar held that, on the wording of section 68 and the related jurisprudence, amounts that were excluded from the definition of income of a bankrupt included those that were accrued or earned prior to bankruptcy but not received between the date of bankruptcy and the date of discharge. Consequently, the payments received by the bankrupt subsequent to discharge were not caught by section 68 and did not constitute income of the bankrupt.
What if there was a delay in claiming the credits through bad faith or for the purpose of obtaining the credit/refund outside of the bankruptcy period: That is, if a bankrupt or a Trustee becomes (or should have become) aware of an unclaimed tax credit or refund prior to or during the bankruptcy process, but did not pursue the issue pending discharge, that could well be a distinguishing factor or one which the Court could take into account in setting terms of discharge. The Registrar confirmed no such evidence was presented in this case; indeed, he noted that all evidence based on the timeline noted above, and the bankrupt’s prior rejection for CPP disability benefits, suggested to the contrary.