Are you considering filing an assignment in bankruptcy rather than appealing a large assessment that you received from the Canada Revenue Agency? If so, you better think twice since it could have a large impact on what kind of order the court will make at your discharge hearing. In Re Baran, 2013 CarswellOnt 16766 (S.C.J.), the Canada Revenue Agency (the “CRA”) issued a notice of reassessment. Rather than appealing the reassessment, Ms. Baran filed an assignment in bankruptcy.
CRA filed a proof of claim with the trustee in bankruptcy. Given that it was a tax driven bankruptcy, Ms. Baran was not entitled to an automatic discharge and the matter proceeded to a discharge hearing. At the discharge hearing, Ms. Baran testified that she could not afford to proceed with an appeal because she lacked money to pay a lawyer. The Deputy Registrar in Bankruptcy stated that Ms. Baran’s evidence could be interpreted as leading to the conclusion that there was no real income tax debt owed by her to CRA. The Deputy Registrar further noted that the CRA did not lead any evidence that could be relied upon to support the factual underpinnings of their claim. Since it was the Deputy Registrar’s role to determine what weight was to be given to the tax debt and Ms. Baran’s evidence suggested that the debt was suspect, the CRA must accept the consequences of not leading any evidence to support its claim. Ultimately, the Deputy Registrar suspended Ms. Baran’s discharge for one day. In effect, the Deputy Registrar determined that Ms. Baran did not really owe any personal taxes.
On appeal, Justice D.M. Brown overturned the Deputy Registrar’s decision by applying the Ontario Court of Appeal’s decision in Re Norris, 1989 CarswellOnt 784. In Re Norris, the Ontario Court of Appeal held that if the CRA delivered a notice of assessment in response to a trustee’s request for evidence to support a proof of claim the notice of assessment is a sufficient answer to the request. A trustee in bankruptcy cannot disallow the assessment. Justice Brown further held that an analysis of the bankrupt’s circumstances at the time the personal tax debt was incurred cannot turn into an inquiry into the validity of an assessed tax debt where the trustee has allowed CRA’s proof of claim. Justice Brown then surveyed the CRA’s case law over the past four years which suggested that payments in the range of 5% to 15% of the tax debt be imposed upon the bankrupt. Ultimately, Justice Brown ordered that Ms. Baran pay $8,000 as a condition of obtaining her discharge which represented only 1% of the tax debt. Even though the sum was not substantial, it may have even been less had Ms. Baran appealed the reassessment and was found on appeal to have owed much less that what she had been assessed for.