Last year the writer wrote a blog regarding tax debtors who file an assignment in bankruptcy rather than appealing a large assessment that the tax debtor received from the Canada Revenue Agency (the "CRA"). As a corollary to that blog, a recent decision of the Quebec Court of Appeal, wherein leave to appeal the decision was sought but denied by the Supreme Court of Canada, puts a wrinkle into the situation where CRA issues a notice of assessment after the tax debtor files an assignment in bankruptcy.
In Re Girard, 2014 CarswellQue 1140 (C.A.), the tax debtor filed an assignment in bankruptcy on May 15, 2009. CRA filed a proof of claim with the trustee in bankruptcy for $89,225.43. This was for an amount that was equal to a notice of assessment issued prior to the tax debtor's bankruptcy. The claim was a secured claim and was paid in full.
CRA subsequently filed an amended unsecured claim for $731,774.46. A few days later, on January 25, 2010, CRA issued Notices of Reassessment to support the amended claim. The Notices were for capital gains that CRA alleged the tax debtor did not declare in 2004 and 2005. The trustee in bankruptcy disallowed CRA's amended claim stating that CRA had not obtained leave pursuant to s.69.4 of the Bankruptcy and Insolvency Act (the "Act") to issue the Notices of Reassessment. CRA appealed the trustee's disallowance of their claim. The Court at first instance upheld the trustee's disallowance. CRA appealed that decision to the Quebec Court of Appeal.
The Quebec Court of Appeal noted that s.69.3 of the Act provides that on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy. In other words, creditors are stayed from commencing or continuing any proceedings against a bankrupt for a claim provable in bankruptcy. The Court also noted that pursuant to s.69.4 of the Act, a creditor who was affected by the operation of s.69.3 of the Act may apply to the court for a declaration that the stay imposed by s.69.3 be lifted.
The Court of Appeal held that the issuing of a notice of assessment or reassessment is the first stage in a process that is ultimately aimed at recovering a claim. Simply because it is an administrative matter does not affect the operation of s.69.3 of the Act. Since the notice is issued with a view to recovering a claim, CRA, like any other ordinary creditor, must obtain leave of the Court, pursuant to s.69.4 of the Act, to issue a notice of assessment or reassessment. As a result, the Court upheld the trustee's disallowance of CRA's amended claim.
If CRA does seek leave from the Court to issue a notice of assessment or reassessment after a tax debtor's bankruptcy, tax debtors may want to take part in the process. If CRA is granted leave, the tax debtor may want challenge the assessment or reassessment since it could have an effect on the order a court makes at their discharge hearing should CRA oppose their discharge.