Schnier v. Canada (Attorney General), 2016 ONCA 5

Schnier v. The Attorney General of Canada

[Indexed as: Schnier v. Canada (Attorney General)]

Ontario Reports

Court of Appeal for Ontario,

Gillese, Blair and D.M. Brown JJ.A.

January 6, 2016

128 O.R. (3d) 537 | 2016 ONCA 5

Case Summary

Bankruptcy and insolvency — Discharge — Personal income tax debt — Amount of assessed personal income tax that was under appeal at time of bankrupt's discharge hearing not included in calculating bankrupt's personal income tax debt under s. 172.1(1) of Bankruptcy and Insolvency Act — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 172.1(1). [page538]

At the time of the bankrupt's discharge, he had unpaid income tax assessments totalling approximately $4.478 million. About $4.424 million of that amount was subject to outstanding appeals by the bankrupt to the Tax Court of Canada. If the full assessed amount was considered part of his personal income tax debt, s. 172.1 of the Bankruptcy and Insolvency Act would apply to his bankruptcy; if the appealed amounts were excluded, s. 172.1 would not apply. The registrar in bankruptcy held that s. 172.1 did not apply to the discharge application. She discharged the bankrupt, subject to a condition that he remit to the trustee the remaining surplus income payable, up to a maximum of $10,000. The motion judge dismissed the Attorney General's motion by way of appeal. The Attorney General appealed.

Held, the appeal should be dismissed.

In calculating the bankrupt's personal income tax debt under s. 172.1(1) of the Bankruptcy and Insolvency Act, the assessed amounts of personal income tax that were under appeal at the time of his discharge hearing were not to be included. The motion judge and the registrar correctly concluded that until the Tax Court of Canada had disposed of the bankrupt's appeals of the assessments, the portion of the Canada Revenue Agency's claim for the assessed amounts under appeal was a contingent one that the trustee could refuse to admit as a proven claim. The stipulation in s. 158 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) that any unpaid amount assessed is "payable forthwith" upon the mailing of a notice of assessment must be understood within the larger context of the taxpayer's right under the Income Tax Act to object to an assessment and to appeal a minister's confirmation of an assessment to the Tax Court of Canada.

2713250 Canada inc. (Re), [2011] J.Q. no 16993, 2011 QCCS 6119, 2012EXP-83, J.E. 2012-61, EYB 2011-198510, 86 C.B.R. (5th) 204; Norris (Re) (1989), 69 O.R. (2d) 285, [1989] O.J. No. 995, 60 D.L.R. (4th) 606, 34 O.A.C. 304, 75 C.B.R. (N.S.) 97, [1989] 2 C.T.C. 185, 89 D.T.C. 5493, 16 A.C.W.S. (3d) 161 (C.A.); Port Chevrolet Oldsmobile Ltd. (Re), [2004] B.C.J. No. 101, 2004 BCCA 37, 193 B.C.A.C. 114, 23 B.C.L.R. (4th) 335, 49 C.B.R. (4th) 146, [2004] G.S.T.C. 8, 128 A.C.W.S. (3d) 436, affg [2002] B.C.J. No. 3206, 2002 BCSC 1874, 49 C.B.R. (4th) 127, [2003] G.S.T.C. 168, consd

Other cases referred to

Cases referred to

Leung v. Canada, [1993] F.C.J. No. 942, [1994] 1 F.C. 482, 67 F.T.R. 1, [1993] 2 C.T.C. 284, 93 D.T.C. 5467, 42 A.C.W.S. (3d) 1104 (T.D.); Murphy v. Sally Creek Environs Corp. (Trustee of), [2010] O.J. No. 1773, 2010 ONCA 312, 261 O.A.C. 199, 67 C.B.R. (5th) 161, 188 A.C.W.S. (3d) 344; Newfoundland and Labrador v. AbitibiBowater Inc., [2012] 3 S.C.R. 443, [2012] S.C.J. No. 67, 2012 SCC 67, 438 N.R. 134, 2012EXP-4268, J.E. 2012-2270, EYB 2012-215017, 352 D.L.R. (4th) 399, 95 C.B.R. (5th) 200, 71 C.E.L.R. (3d) 1, 221 A.C.W.S. (3d) 264; Regina Shoppers Mall Ltd. v. Canada, [1991] F.C.J. No. 52, 126 N.R. 141, [1991] 1 C.T.C. 297, 91 D.T.C. 5101, 25 A.C.W.S. (3d) 748 (C.A.); Rizzo & Rizzo Shoes Ltd. (Re) (1998), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, 154 D.L.R. (4th) 193, 221 N.R. 241, J.E. 98-201, 106 O.A.C. 1, 50 C.B.R. (3d) 163, 33 C.C.E.L. (2d) 173, 98 CLLC Â210-006, D.T.E. 98T-154, 76 A.C.W.S. (3d) 894; Royal Bank of Canada v. Central Capital Corp. (1996), 27 O.R. (3d) 494, [1996] O.J. No. 359, 132 D.L.R. (4th) 223, 88 O.A.C. 161, 26 B.L.R. (2d) 88, 38 C.B.R. (3d) 1, 61 A.C.W.S. (3d) 18 (C.A.); Terra Nova Properties Ltd. v. M.N.R., [1967] 2 Ex. C.R. 46, [1967] C.T.C. 82, 67 D.T.C. 5064 (Exch. Ct.); Wesbrook Management Ltd. v. Canada, [1996] F.C.J. No. 1466, 206 N.R. 23, [1997] 1 C.T.C. 124, 96 D.T.C. 6590, 67 A.C.W.S. (3d) 191 (C.A.) [page539]

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 108 [as am.], (1) [as am.], 121 [as am.], (1), (2) [as am.], 135 [as am.], (1.1) [as am.], (3) [as am.], 136(1) [as am.], 170(1) [as am.], 172.1 [as am.], (1), (8) [as am.]

Excise Tax Act, R.S.C. 1985, c. E-15 [as am.]

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) [as am.], ss. 152(8) [as am.], 158 [as am.], 165(3) [as am.], Part XV [as am.], ss. 223(1) [as am.], (2), 223-225 [as am.], 225.1 [as am.], (2) [as am.], (3) [as am.], (5) [as am.], 225.2, 248(2) [as am.]

APPEAL from the order of T.J. McEwen J. of the Superior Court of Justice dated December 8, 2014 affirming a decision of the registrar in bankruptcy.

Kevin Dias and Maria Vujnovic, for appellant.

Fred Tayar, for respondent.

The judgment of the court was delivered by

D.M. BROWN J.A.: —

I. Overview

1Special rules govern discharge hearings in income tax-driven personal bankruptcies. Section 172.1 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA") provides that where the bankrupt has $200,000 or more of personal income tax debt and that personal income tax debt represents 75 per cent or more of the bankrupt's total unsecured proven claims, the timing of the discharge hearing, the discharge orders available to the court to make, and the factors the court must take into account in deciding the discharge application differ from those applied in a standard bankruptcy.

2At the time of his discharge hearing, the respondent bankrupt, Paul Schnier, had unpaid income tax assessments totalling approximately $4.478 million. About $4.424 million of that amount was subject to outstanding appeals he had filed in the Tax Court of Canada. If the full assessed amount was considered part of his personal income tax debt, s. 172.1 of the BIA would apply to his bankruptcy; if the appealed amounts were excluded, s. 172.1 would not apply.

3The registrar in bankruptcy held that s. 172.1 of the BIA did not apply to Mr. Schnier's application for discharge. Her order of July 18, 2014 (the "discharge order") discharged Mr. Schnier, subject to the condition that he remit to the trustee the remaining surplus income payable, up to a maximum of $10,000. [page540]

4By order dated December 8, 2014 (the "appeal order"), the motion judge dismissed the Attorney General's motion by way of appeal from the discharge order. The Attorney General now appeals to this court.

5Although the Attorney General asks that the appeal order be set aside, if it is, the Attorney General does not seek to vary the conditions of the discharge order made by the registrar. The relief sought by the Attorney General on this appeal is limited to a determination that s. 172.1 of the BIA applied to Mr. Schnier's discharge hearing.

6The issue then, on this appeal, is a narrow one: In calculating Mr. Schnier's personal income tax debt under BIA, s. 172.1(1), should the assessed amounts of personal income tax that were under appeal at the time of his discharge hearing be included?

7For the reasons set out below, I conclude the answer is no, and I would dismiss the appeal. Both the motion judge and the registrar correctly concluded that until the Tax Court of Canada had disposed of Mr. Schnier's appeals of the Canada Revenue Agency ("CRA") assessments, the portion of the CRA's claim for the assessed amounts under appeal was a contingent one that the trustee could refuse to admit as a proven claim. Accordingly, the motion judge and the registrar correctly held that s. 172.1 of the BIA did not apply to Mr. Schnier's discharge hearing.

II. Background

8Mr. Schnier is a tax lawyer. His bankruptcy was driven by investments he made in two types of tax shelters. Between 1985 and 1991, Mr. Schnier invested in two yacht tax shelters. In the 1990s and early 2000s, he invested in four computer software tax shelters. Mr. Schnier claimed deductions from his income on those investments for either interest expenses or business losses. At the time Mr. Schnier made these investments, he believed that the tax shelters were permitted under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA"); he had made the investments after receiving opinions from independent tax lawyers and accountants.

9Beginning in 1989, Mr. Schnier received notices of reassessment in relation to the yacht tax shelters going back to the 1985 taxation year. He immediately served on the Minister of National Revenue notices of objection to all of the CRA reassessments.

10Section 165(3) of the ITA provides that upon receipt of a notice of objection, the minister "shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the [page541] assessment or reassess". That did not occur in this case. Inexplicably, the minister allowed Mr. Schnier's objections to languish for over two decades. During that time, Mr. Schnier repeatedly asked the CRA to deal with his file, to no avail. It was not until October 2011 that the minister confirmed the reassessments for the yacht tax shelters. Mr. Schnier promptly filed notices of appeal to the Tax Court of Canada in November 2011.

11The following month, Mr. Schnier made a proposal to his creditors under the BIA. At that time, he had been assessed $1,278,519.62 in income tax, plus penalties and interest, for a total of $4,478,703.19. Although Mr. Schnier increased the amount of his proposal to creditors over the course of the following creditors' meetings, the CRA rejected the proposal, resulting in his deemed assignment into bankruptcy on January 19, 2012.

12On February 1, 2012, the CRA filed a proof of claim in the bankruptcy in the amount of $4,478,703.19 (the "claim"). The CRA disclosed that of the amount claimed, $4,424,558.19 was under appeal.

13In January 2013, the minister confirmed the assessments for the computer software tax shelters. Mr. Schnier filed appeals from those assessments in April 2013.

14In its February 4, 2014 report on the bankrupt's application for discharge, the trustee noted that the Tax Court had not yet determined Mr. Schnier's appeals of the CRA assessments. As a result, the trustee reported that it was "unable to value the claim and has not admitted CRA's claim for the assessed amounts under appeal as it is contingent". Consequently, the trustee's July 9, 2014 claims register admitted only $71,170.40 of the claim, and recorded the remaining $4.424 million of the claim as a contingent claim which was not admitted by the trustee.

15The CRA opposed Mr. Schnier's application to be discharged from bankruptcy.

16The registrar was required to consider whether the rules governing tax-driven personal bankruptcies set out in BIA, s. 172.1 applied to Mr. Schnier's bankruptcy. The reason is that important differences exist in the discharge procedures for individual bankrupts who fall within s. 172.1 and those who do not:

(i) in a standard personal bankruptcy, the passage of time may result in the automatic discharge of a bankrupt; under s. 172.1, an application to the court for a discharge hearing must be made;

(ii) in a standard personal bankruptcy, the court may grant an absolute order of discharge; such an order is not available if s. 172.1 applies; [page542]

(iii) if a court suspends the discharge in a s. 172.1 bankruptcy, the court must require the bankrupt to file income and expense statements with the trustee each month and to file all returns of income required by law to be filed; and

(iv) a court must take into account the following factors in considering a s. 172.1 discharge application: the circumstances of the bankrupt at the time the personal income tax debt was incurred; the efforts, if any, made by the bankrupt to pay the personal income tax debt; whether the bankrupt made payments in respect of other debts while failing to make reasonable efforts to pay the personal income tax debt; and the bankrupt's financial prospects.

17In her July 18, 2014 reasons, the registrar considered that the CRA was a proven creditor to the extent of the claims admitted by the trustee -- about $71,170. The balance of the CRA's claim consisted of assessed amounts of tax that were subject to appeals pending in the Tax Court of Canada and constituted a contingent claim. The registrar concluded that, "at present, the CRA has a contingent liability that cannot support the applicability of s. 172.1 of the BIA". On appeal, the motion judge agreed with the registrar.

III. Issue on the Appeal

18At issue on this appeal is whether s. 172.1(1) of the BIA applied to Mr. Schnier's discharge hearing. The section provides that the special income tax-driven bankruptcy discharge rules apply "[i]n the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt represents 75% or more of the bankrupt's total unsecured proven claims".

19The parties offer competing interpretations of what constitutes "personal income tax debt" for purposes of s. 172.1. The Attorney General argues that "personal income tax debt" includes unpaid assessed tax, notwithstanding any right the taxpayer has to file an objection or appeal. The Attorney General submits that in this case, all of the $4.4 million CRA claimed in its proof of claim were amounts payable as of the dates of assessment, and remained payable under the ITA notwithstanding Mr. Schnier's subsequent appeals.

20The Attorney General submits that its interpretation is consistent with the express language of the ITA, which I discuss in detail below. It acknowledges a pair of cases that take the contrary view: [page543] Port Chevrolet Oldsmobile Ltd. (Re), 2002 BCSC 1874, 49 C.B.R. (4th) 127, affd 2004 BCCA 37; and 2713250 Canada inc. (Re), 2011 QCCS 6119. The Attorney General submits that those cases were wrongly decided and should not be followed by this court.

21For his part, Mr. Schnier argues that on a proper interpretation of the ITA, his unpaid assessed amounts of tax that were subject to appeal were contingent claims which the trustee in bankruptcy did not accept as proven claims and, therefore, did not constitute "personal income tax debt" for the purposes of BIA, s. 172.1(1). Mr. Schnier submits that Port Chevrolet (Re) and 2713250 Canada inc. (Re) were correctly decided and should be followed by this court.

IV. Standard of Review

22The applicable standard of review was set out by this court in Murphy v. Sally Creek Environs Corp. (Trustee of), 2010 ONCA 312, 67 C.B.R. (5th) 161, at paras. 68, 70 and 72. On an appeal of a discharge order made by a registrar in bankruptcy, the reviewing motion judge may only set aside the order if the registrar erred in principle or in law, failed to take into account a proper factor, took into account an improper factor that demonstrably led to a wrong conclusion, or made a palpable and overriding error in respect of a finding of fact. The same standard of review applies to a further appeal to this court, although the decision under appeal is that of the motion judge, not the registrar. A motion judge will commit an error of law if he or she does not adhere to the correct standard when reviewing the registrar's decision.

V. Analysis

23Since the issue on this appeal concerns the interpretation of a statutory provision, I start by considering the legislative context in which s. 172.1 of the BIA is situated. I then outline and analyze the Attorney General's arguments regarding the proper interpretation of "personal income tax debt" that draw upon the language of the ITA. Next, I consider the Attorney General's argument that this court should decline to follow Port Chevrolet (Re) and 2713250 Canada inc. (Re). I then address the Attorney General's concern that upholding the motion judge's decision could invite abuse of the bankruptcy process. Finally, I consider the Attorney General's argument that the trustee in this case failed to determine whether or not CRA's claim was provable. [page544]

A. The legislative context for the analysis

24Applying the basic principle of statutory interpretation, the words "personal income tax debt" in BIA, s. 172.1(1) must be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the BIA, its object and the intention of Parliament: Rizzo & Rizzo Shoes Ltd. (Re) (1998), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21.

25A bankruptcy under the BIA follows a single proceeding model. In general terms, the property of the bankrupt not subject to security interests is realized and collected by the trustee in bankruptcy and then distributed to creditors with proven claims in accordance with the priorities set out in the scheme of distribution found in BIA, s. 136(1).

26At the heart of this distribution scheme lies the concept of creditor claims provable in bankruptcy. Section 121(1) of the BIA describes what claims are provable in a bankruptcy:

121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

27Liquidated claims are not the only ones provable in a bankruptcy. Section 121(2) of the BIA specifically recognizes contingent claims as provable in a bankruptcy by providing that "[t]he determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with section 135".

28In each bankruptcy, the trustee must examine and classify the claims filed by the bankrupt's creditors: BIA, s. 135. As part of that process, the trustee must consider whether the characteristics of a debt claimed by a creditor are those of a liquidated claim, future claim or contingent claim. If a trustee concludes that the debt claimed has the character of a contingent claim, the trustee must then determine whether the contingent claim is a provable claim. As BIA, s. 135(1.1) states:

135(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.

29As explained by the Supreme Court of Canada in Newfoundland and Labrador v. AbitibiBowater Inc., [2012] 3 S.C.R. 443, [2012] S.C.J. No. 67, 2012 SCC 67, at paras. 34 and 36, [page545] "a claim may be asserted in insolvency proceedings even if it is contingent on an event that has not yet occurred", and "[t]he criterion used by courts to determine whether a contingent claim will be included in the insolvency process is whether the event that has not yet occurred is too remote or speculative".

30This general legislative scheme for the examination and determination of creditor claims in a bankruptcy provides the critical context in which to determine the narrow issue raised by this appeal -- i.e., whether the assessed amounts of income tax that were under appeal at the time of Mr. Schnier's discharge hearing should be included when calculating his personal income tax debt under BIA, s. 172.1(1). That is so because whether s. 172.1 applies to a bankruptcy turns on how the trustee classifies a claim by the CRA for the payment of assessed amounts of income tax which remain subject to an appeal by the bankrupt taxpayer at the time of his discharge hearing. The arguments advanced by the parties about the proper interpretation of "personal income tax debt" in s. 172.1(1) must be assessed within the larger context of this legislative scheme.

B. "Amounts payable" within the meaning of ITA, s. 223(1)

31As noted, s. 172.1(1) of the BIA provides that the special discharge hearing rules apply "[i]n the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt represents 75% or more of the bankrupt's total unsecured proven claims".

32Section 172.1(8) of the BIA defines "personal income tax debt" to mean "the amount payable, within the meaning of subsection 223(1) of the Income Tax Act . . . by an individual".

33Section 223(1) of the ITA defines an "amount payable" by a person as any or all of "an amount payable under this Act by the person".

34What are the fundamental characteristics of an "amount payable" under the ITA? The Attorney General argues that there are two. First, s. 158 of the ITA provides:

158. Where the Minister mails a notice of assessment of any amount payable by a taxpayer, that part of the amount assessed then remaining unpaid is payable forthwith by the taxpayer to the Receiver General.

35Second, s. 152(8) of the ITA deems an assessment to be "valid and binding". According to the Attorney General, when combined together these two characteristics of an unpaid assessed personal income tax debt are determinative of the analysis in this appeal. Even if a taxpayer appeals an assessment, the character of the tax debt remains one that is "payable [page546] forthwith" (s. 158) and "valid and binding" (s. 152(8)): in effect, a liquidated claim. As a result, the Attorney General submits, "personal income tax debt" within the meaning of BIA, s. 172.1(1) includes unpaid assessed amounts of income tax that are under appeal.

36I do not find that argument persuasive, for two reasons.

37First, the roles played by ss. 152(8) and 158 of the ITA in the characterization of an assessed tax debt must take into account the right of a taxpayer to appeal a notice of assessment to the Tax Court of Canada under Part I, Division J of the ITA.

38Section 152(8) of the ITA expressly provides that the valid and binding effect of an assessment is made subject to a taxpayer's right to appeal an assessment. The section states:

152(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.

(Emphasis added)

39As put by the Federal Court of Appeal in Wesbrook Management Ltd. v. Canada, [1996] F.C.J. No. 1466, [1997] 1 C.T.C. 124 (C.A.), at p. 129 C.T.C., when commenting on the effect of what is now s. 152(8): "Once . . . an assessment can no longer be varied or vacated on objection or appeal . . . the last assessment is deemed valid and binding on both the taxpayer and the Minister".¹

40Section 248(2) of the ITA is to the same effect. It states that "the tax payable by a taxpayer under any Part of this Act by or under which provision is made for the assessment of tax means the tax payable by the taxpayer as fixed by assessment or reassessment subject to variation on objection or on appeal, if any, in accordance with the provisions of that Part" (emphasis added).

41Both ss. 152(8) and 248(2) indicate that until the objection or appeal process is concluded, the amount of tax the minister can compel a taxpayer to pay cannot be known. The assessed amount can change from time to time by virtue of judicial decisions or new assessments: Terra Nova Properties Ltd. v. M.N.R., [1967] 2 Ex. C.R. 46, [1967] C.T.C. 82 (Exch. Ct.), at p. 51 Ex. C.R. [page547]

42The stipulation in s. 158 of the ITA that any unpaid amount assessed is "payable forthwith" upon the mailing of a notice of assessment must be understood within the larger context of the taxpayer's right under the ITA to object to an assessment and to appeal a minister's confirmation of an assessment to the Tax Court of Canada.

43Second, Part XV of the ITA places significant restrictions on the minister's ability to collect assessed amounts that are "payable forthwith" where a taxpayer has objected to or appealed those amounts.

44Usually, where an amount is payable under the ITA, s. 223(2) authorizes the minister to certify an amount payable that has not been paid "as an amount payable by the debtor". A certificate of an amount payable under ITA, s. 223(2) can be registered in the Federal Court and, when registered, has the same effect as if the certificate were a judgment obtained in the Federal Court against the tax debtor. Sections 223 through 225 then describe the different enforcement steps available to the minister to collect the amount payable: commencing legal proceedings in court; certifying the amount due under s. 223; using statutory garnishment remedies; and seizing the tax debtor's goods and chattels.

45However, when a taxpayer files an objection to or appeals an assessment, s. 225.1 places limits on the minister's ability to take steps to collect the assessed amounts. If a taxpayer has served a notice of objection to an assessment, the minister cannot take any of the statutory enforcement steps until 90 days after the minister has sent his notice of confirmation to the taxpayer (s. 225.1(2)). Similarly, if a taxpayer has appealed from an assessment to the Tax Court of Canada, the minister cannot take any of those steps before the day of mailing of a copy of the decision of that court to the taxpayer (s. 225.1(3)).²

46The rationale behind the limits s. 225.1 places on the minister's ability to collect is that it would be unfair to allow the minister to collect an assessed amount of tax until there is a final determination of the ultimate amount the taxpayer must pay.³ [page548]

47In my view, the Attorney General takes far too narrow an approach to what constitutes an "amount payable" under ITA, s. 223(1), and therefore "personal income tax debt" in BIA, s. 172.1. The Attorney General's submission focuses on only some of the characteristics of an assessed income tax debt -- "payable forthwith" and "valid and binding notwithstanding any error, defect, or omission". It ignores the critical effect of sections 152(8), 225.1 and 248(2) of the ITA that enable a taxpayer to appeal an assessment and limit the collectability of that tax debt by the minister until the courts dispose of the appeal.

48When the provisions of the ITA are considered as a whole, the meaning of "amount payable" as used in ITA, s. 223(1) and BIA, s. 172.1(8) must take into account that where a taxpayer has appealed an assessment to the Tax Court of Canada, the actual amount of tax that the minister can compel the taxpayer to pay will not be known until the occurrence of a future event -- i.e., the determination of the taxpayer's appeal from the assessment. This is a hallmark of a contingent claim.

49Further, a creditor's inability to enforce a claim bears directly on the creditor's ability to prove its claim under the BIA. In order to be a provable claim within the meaning of BIA, s. 121, a claim must be one recoverable by legal process: Royal Bank of Canada v. Central Capital Corp. (Re) (1996), 27 O.R. (3d) 494, [1996] O.J. No. 359 (C.A.), at pp. 532-33 O.R. The restraints placed by ITA, s. 225.1 on the enforceability of an assessed amount of tax that is under appeal are strong indicators that a claim based on those amounts would not be provable in a bankruptcy.

50Consequently, where amounts of income tax assessed against an individual bankrupt taxpayer remain under appeal at the time of his discharge hearing, the existence of the outstanding appeal entitles the trustee to classify the claim based on the unpaid assessed amounts as a contingent, unprovable one.

C. The jurisprudence

51Turning to the jurisprudence, the Attorney General advances two arguments: (i) support for its position can be found in the decision of this court in Norris (Re) (1989), 69 O.R. (2d) 285, [1989] O.J. No. 995 (C.A.); and (ii) the British Columbia and Quebec courts were wrong to conclude in Port Chevrolet (Re) and 2713250 Canada inc. (Re), respectively, that an unpaid assessed amount of tax under appeal is a contingent claim. [page549]

The decision in Norris (Re)

52The Attorney General submits that Norris (Re) stands for the principle that in carrying out its duties under the BIA, a trustee cannot ignore what Parliament has legislated with respect to tax debts. Applying that principle to the present case, the Attorney General argues that the trustee must give full recognition to assessed amounts under appeal because under the ITA a taxpayer becomes liable for an unpaid portion of an assessment when the notice of assessment is sent. That liability continues to exist until the assessment is varied or vacated on an objection or appeal.

53In my view, the principle in Norris (Re) does not extend as far as the Attorney General submits. That case involved the bankruptcy of an individual against whom an assessment had been issued under the ITA. Critically, unlike in the present case, the bankrupt had not filed a notice of objection to the assessment. The Crown filed a proof of claim in the bankruptcy for the assessed amount and provided the trustee with the notice of assessment. The trustee disallowed the claim. This court held, at p. 287 O.R., that the trustee's request for evidence to support the proof of claim was fully answered by the notice of assessment, and if the trustee in bankruptcy wished to question the validity of an assessment against the bankrupt, it was required to seek its remedy within the ITA by filing a notice of objection.

54In the present case, the trustee did not look behind the notice of assessment in order to ascertain the amount of Mr. Schnier's personal income tax debt. Instead, the trustee gave effect to the appeal and enforcement provisions of the ITA. Whether the tax debt was liquidated or contingent for purposes of the BIA depended upon whether the taxpayer had exercised the appeal rights granted by the ITA and, if he had, whether s. 225.1 of the ITA restrained the minister from taking steps to enforce and collect the assessed amount. The trustee took into account that no final determination of Mr. Schnier's appeal had been made under the ITA, with the result that it was unable to value the CRA's claim.

The decisions in Port Chevrolet (Re) and 2713250 Canada inc. (Re)

55More relevant to the facts of this case are two decisions dealing with the power of the chair of a meeting of creditors under s. 108 of the BIA to admit or reject a proof of claim for the purpose of voting: Port Chevrolet (Re) and 2713250 Canada inc. (Re). [page550]

56In the Port Chevrolet (Re) case, the Canada Customs Revenue Agency ("CCRA") had issued an assessment under the Excise Tax Act, R.S.C. 1985, c. E-15 to Port Chevrolet for about $16.4 million. The company filed a notice of intention to make a proposal under the BIA. The company also filed a notice of objection to the assessment. The CCRA filed a proof of claim in the amount of about $15.8 million the day before the meeting of creditors to vote on the company's proposal. The trustee disallowed CCRA's claim and valued it at nil, taking the view that it was unproven because it was based on an unresolved appeal and notice of objection. Relying on the trustee's disallowance, the chair of the creditors' meeting concluded that the CCRA claim was contingent and valued it at nil for voting purposes.

57The CCRA appealed the trustee's disallowance of its claim and the chair's decision that it had no right to vote at the meeting. The chambers judge dismissed the appeal on two grounds. First, the CCRA had failed to file a proof of claim in proper form: at para. 25. Second, the court rejected the CCRA's argument that provisions in the Excise Tax Act analogous to ss. 152(8) and 158 of the ITA created a valid and binding debt due from the moment of assessment regardless of the pending objection and appeal process: at paras. 35-36. The court stated, at para. 43:

[I]f CCRA wishes to participate in concurrent proceedings under the Bankruptcy and Insolvency Act, then it is bound to comply with the Bankruptcy and Insolvency Act process with respect to proving its claim, and that compliance includes recognition of the trustee's powers to determine a claim is contingent and value it accordingly. I do not read Re Norris as precluding a trustee from exercising his discretion under s. 135(1.1).

58The British Columbia Court of Appeal affirmed the decision, but only in respect of the finding that the CCRA had failed to file a proof of claim in proper form. The BCCA specifically declined to consider the trustee's disallowance of the CCRA's contingent claim.

59A similar issue arose in a Quebec case involving a proposal made by 2713250 Canada Inc. under the BIA. The Agence du revenue du Québec ("ARQ") had issued two notices of assessment to the debtor company for which the company had filed notices of objection. The ARQ filed proofs of claim in the proposal proceedings based upon the full amount of the assessments. At two meetings of creditors, the proposal trustee held that the ARQ's claims were contingent and impossible to value because of the pending appeal of the notices of assessment. [page551] Therefore, the ARQ was ineligible to vote. The ARQ appealed the trustee's decisions.

60Gascon J., as he then was, dismissed the appeal, applying the reasoning of the chambers judge in the Port Chevrolet (Re) case. He held that in exercising the power conferred on it by BIA, s. 108(1), the trustee could conclude that the ARQ's claims were in fact contingent, unliquidated and not provable claims, due to the impossibility of valuing them with any certainty: at para. 86. Gascon J. then considered, and rejected, the ARQ's argument about the validity and binding nature of its notices of assessment, at paras. 88 through 94:

Contrary to what the ARQ argues, the Court believes that in exercising the power ascribed to it by section 108(1), the Trustee was not legally bound to consider as valid, regardless of the situation, the notices of assessment on which the disputed proofs of claims are based.

On the one hand, if the relevant tax laws establish a presumption of validity of those notices of assessment, that presumption is not irrebuttable. The objection process such tax laws authorize surely demonstrates this.

On the other hand, the presumptions of validity established by tax laws are not incompatible with the exercise of the jurisdiction which the BIA confers on the Trustee pursuant to sections 108, 121 or 135 of the BIA.

As the Court of Appeal for British Columbia points out in its analysis of the problem in Port Chevrolet, there are two possible solutions under such circumstances.

The first is that in terms of a proof of claim filed under the BIA, one must give, without reservation, full faith and credit to any notice of assessment by the tax authorities, regardless whether it may eventually be set aside.

The second is that we can reconcile the BIA and tax laws by drawing a distinction between, on the one hand, business judgment and a trustee's practice in exercising its powers under the BIA and, on the other hand, the "rebuttable" presumptions of validity of tax laws which subsist notwithstanding the prescribed objection and appeal processes.

For its part, the Court prefers the second solution, which is much more respectful of the objectives of the BIA.

(Translation from French)

61Although the Port Chevrolet (Re) and 2713250 Canada Inc. (Re) cases both involved the exercise by trustees of their discretion in the context of admitting or rejecting proofs of claim for the purposes of voting under BIA, s. 108(1), in my view the reasoning in Port Chevrolet (Re), as adopted by 2713250 Canada inc. (Re), applies equally to the exercise of the trustee's general power to determine whether a contingent claim is a provable claim under ss. 121 and 135 of the BIA. Where a bankrupt taxpayer has appealed assessed amounts of income tax, it is open to a trustee to characterize a CRA proof of claim based on those [page552] assessments as a contingent claim. If the claim cannot be valued with any certainty prior to the disposition of the appeal, the trustee may treat the contingent claim as not provable in the bankruptcy.

62Such a result gives full recognition to the provisions of the ITA discussed earlier dealing with the calculation and enforcement of assessed amounts of income tax, while treating a proof of claim based on an appealed assessment in a manner harmonious with the general scheme of the BIA concerning creditors' proofs of claim.

63Such an interpretation is also consistent with the language of s. 172.1(1) of the BIA, which provides that the special discharge rules for tax-driven personal bankruptcies apply "in the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt represents 75% or more of the bankrupt's total unsecured proven claims" (emphasis added). The use of the word "represents" signifies that in order for "personal income tax debt" to be capable of representing 75 per cent of a bankrupt's unsecured "proven claims", the "personal income tax debt" must possess the characteristics of a provable claim in bankruptcy. Put another way, to qualify as "personal income tax debt" within the meaning of s. 172.1(1), the tax debt must be a proven claim.

64To hold otherwise would give unfair, preferential treatment to CRA proofs of claim based on assessed income tax amounts that remain under appeal at the time of a discharge hearing. If the full amount of the assessed amount under appeal was recognized as a claim provable in the bankruptcy, and the taxpayer's appeal of the assessment was later allowed and the assessed amount reduced or eliminated, the CRA would have obtained an unjustified advantage over other creditors in the bankruptcy proceeding.

D. Potential abuse of the bankruptcy process

65Against that conclusion, the Attorney General argues that to treat CRA claims for unpaid assessed income tax under appeal as contingent ones that may not be provable would render meaningless s. 172.1 of the BIA. A taxpayer who was subject to significant income tax assessments could abuse the bankruptcy process by appealing his assessment, then make an assignment in bankruptcy and fail to expedite the hearing of his tax appeal. That would allow a bankrupt to avoid the special discharge rules created by s. 172.1 for tax-driven bankruptcies.

66In my view, the motion judge correctly addressed this argument when he held that "an adjournment could have been [page553] sought before the [registrar] so the appeal could be heard and no attempt was made in this case". Indeed, had the CRA sought a brief adjournment of Mr. Schnier's discharge hearing, no dispute could have arisen about the applicability of s. 172.1 to his bankruptcy, as the following chronology of events discloses.

67Section 225.1(5) of the ITA states that where a taxpayer who has appealed to the Tax Court of Canada has agreed to delay his appeal until the court has decided related test cases, then the minister may take actions to enforce the assessments against the taxpayer at any time after the minister gives written notice to the taxpayer that the decision of the Tax Court of Canada in the test case has been mailed to the minister.

68In February 2012, Mr. Schnier had filed with the Tax Court of Canada his agreement to be bound in the lead test cases before that court concerning the deductibility of expenses relating to the yacht tax shelters. The Tax Court of Canada confirmed that it would hold his appeal in abeyance pending the resolution of the three lead test cases. The lead cases concerning the yacht tax shelters were dismissed on January 7, 2014, and an appeal from that dismissal to the Federal Court of Appeal was withdrawn on March 19, 2014. Both those events took place before Mr. Schnier's bankruptcy hearing.

69However, the Tax Court of Canada did not formally dismiss Mr. Schnier's appeal from the yacht tax shelter assessments until August 18, 2014, slightly more than a month after his discharge hearing was held. The record does not explain when the Tax Court of Canada mailed the minister the decision dismissing the lead test appeals concerning the yacht tax shelters or why the minister did not send a written notice of the decision to Mr. Schnier prior to his discharge hearing. From the transcript of the discharge hearing, it is apparent that the parties were aware the test cases had been resolved in favour of the CRA: appeal book, p. 56. Why, given those circumstances, the CRA did not ask for a short adjournment of the discharge hearing pending formal notice to Mr. Schnier of the dismissal of the lead test appeals pursuant to ITA, s. 225.1(5) was not explained in the record before us.

E. Whether the trustee disallowed any part of the claim

70Finally, in her factum, the Attorney General argued that the trustee had failed to determine whether or not the CRA's claim was provable. I disagree.

71Although the appeal record did not contain a notice of disallowance issued by the trustee under BIA, s. 135(3) in respect of [page554] the claim, appellant's counsel candidly conceded that there was no evidence before the court about what, if anything, the trustee did under s. 135.

72In any event, the evidence showed that the CRA was aware well before the discharge hearing that the trustee had disallowed that part of its claim covering the assessed amounts under appeal. The trustee's report under s. 170(1) on the bankrupt's application for discharge was dated February 4, 2014, some five months prior to the discharge hearing, and was signed by the inspectors, including one of the inspectors who was an employee of the CRA. The report clearly stated that the trustee was unable to value most of the CRA's claim and had not admitted the portion concerning the assessed amounts under appeal as it was contingent. The trustee's July 9, 2014 claims register also recorded that $4.385 million of the CRA claim had been classified as contingent and had not been admitted for dividend. Accordingly, the evidence before the registrar at the time of the discharge hearing was that the trustee had determined that only $71,170 of the CRA claim was provable in the bankruptcy.

F. Conclusion

73For 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.

VI. Disposition

74I would dismiss the appeal. The parties agreed that the successful party would be entitled to costs of the appeal on a partial indemnity basis in the amount of $15,000. I would therefore order the Attorney General of Canada to pay Mr. Schnier costs of $15,000, inclusive of HST and disbursements.

Appeal dismissed.

[page555]

Notes

End of Document

Footnotes

1. 1Moreover, the case law interpreting s. 152(8) treats the section's purpose as a modest one, operating as a curative provision ensuring the validity of an administratively issued assessment despite any errors, defects or omissions: Regina Shoppers Mall Ltd. v. Canada, [1991] F.C.J. No. 52, [1991] 1 C.T.C. 297 (C.A.), at p. 301 C.T.C.; Leung v. Canada, [1993] F.C.J. No. 942, [1993] 2 C.T.C. 284 (T.D.), at p. 302 C.T.C.
2. 2Although ITA, s. 225.1 provides for certain exceptions to these bars to collection, none apply to the facts of the present case.
3. 3If reasonable grounds exist to believe that the collection of an assessed amount would be jeopardized by a delay in collection, ITA, s. 225.2 authorizes the minister to apply ex parte to the court for an order allowing him to take enforcement steps.