On January 6, 2016, the Ontario Court of Appeal released its decision in Schnier v. Canada (Attorney General), addressing the question of whether a bankrupt’s personal income tax debt under appeal constitutes “personal income tax debt” as that phrase is used in the Bankruptcy and Insolvency Act (“BIA”).
Does the Court’s decision create a situation where personal income tax debt under appeal unwittingly “survives” and is to be “carved out” of the bankruptcy or proposal process?
The facts in Schnier were straightforward. The bankrupt/tax debtor (ironically, a tax lawyer) had unpaid income tax assessments totalling approximately $4.478 million. Approximately $4.424 million of this amount was subject to outstanding appeals filed in the Tax Court of Canada. If the full assessed amount was considered to be part of the bankrupt’s personal income tax debt, then s.172.1 of the BIA would apply; but if the appealed amounts were excluded, then s. 172.1 would not apply.
The significance of s.172.1 is that special rules apply for a discharge from bankruptcy where a bankrupt has $200,000 or more in “personal income tax debt” and whose “personal income tax debt” represents 75% or more of the bankrupt’s total unsecured claims. Most notably, an absolute order of discharge is not available on a discharge hearing in those circumstances.
The registrar held that the amount of the bankrupt’s tax debt under appeal did not constitute part of the bankrupt’s “personal income tax debt” and, therefore, s.172.1 did not apply. The registrar discharged the bankrupt conditional on his remitting the balance of his surplus income payments, up to a maximum of $10,000. The Attorney General appealed to a judge. The judge upheld the registrar’s decision and dismissed the appeal. The Attorney General appealed to the Ontario Court of Appeal. The Court of Appeal upheld the decisions of the registrar and the judge and dismissed the appeal.
It is noted that the Attorney General did not seek to set aside the conditional order of discharge. Rather, the Attorney General was only concerned with and objected to the finding that the tax debt under appeal did not form part of the “personal income tax debt” of the bankrupt under s.172.1.
The following are some points that the Court of Appeal made in rendering its decision:
- A CRA proof of claim in respect of personal tax debt under appeal is a contingent claim. Accordingly, it is not a claim provable in bankruptcy until the appeal is resolved;
- For the purpose of applying for a discharge hearing, any CRA claim for personal tax debt under appeal will not form part of the “personal income tax debt” of the bankrupt for the purpose of s.172.1. As such, the regular discharge hearing provisions apply; and,
- CRA’s claim for personal tax debt under appeal will remain a contingent claim, and will not be a provable claim, at the bankrupt’s discharge hearing if the tax appeal has not been resolved by that time. The Court of Appeal noted that the Attorney General could have requested an adjournment of the discharge hearing in order to first dispose of the tax appeal, which then would change the nature of its claim from contingent to provable prior to the bankrupt’s discharge hearing.
Here is the wrinkle in the case. Prior to bankruptcy, Mr. Schnier had agreed with CRA to be bound by lead test cases that were before the Tax Court. These lead cases were dismissed on January 7, 2014; however, CRA did not take steps to formally dismiss Mr. Schnier’s Tax Court appeal until August 18, 2014, one month after the discharge decision on July 18, 2014. Thus, Mr. Schnier’s Tax Court appeal was technically outstanding and pending at the time of the discharge hearing, meaning (again, technically) that that part of the tax debt that was under appeal remained a contingent or unprovable claim. To quote from the Court’s decision:
[73] For the reasons set out above, I conclude that both the motion judge and the Registrar were correct in concluding that until the Tax Court of Canada disposed of Mr. Schnier’s appeals of the CRA’s assessments, the CRA’s claim in the bankruptcy for the assessed amount under appeal was a contingent one which the trustee could refuse to admit as a proven claim. Consequently, the motion judge and the Registrar correctly concluded that s. 172.1 of the BIA did not apply to Mr. Schnier’s discharge hearing.
If Mr.Schnier’s personal tax debt under appeal was a contingent and unprovable claim, then if follows that his liability for this personal tax debt is not released by his discharge from bankruptcy. This is because s. 178(2) of the BIA provides that a discharge from bankruptcy only releases the bankrupt from all claims provable in bankruptcy.
Does this all mean that Mr. Schnier has continuing liability for his personal income tax debt, which was contingent and unprovable at the date of his discharge but which became liquidated and provable thereafter when his Tax Court appeal was dismissed?
The bottom line seems to be that a tax debtor has to admit, or agree with CRA to a quantification of, any personal tax debt under appeal if the intention is to compromise and settle that personal income tax debt in a bankruptcy (or proposal) proceeding.