ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 11-14690039
DATE: 2012-04-30

In the matter of the bankruptcy of Edward James Gilbert of the City of Thunder Bay in the District of Thunder Bay in the Province of Ontario

B E T W E E N:

BDO CANADA LIMITED, as Trustees of the Estate of Edward James Gilbert,

Jayson Stoppel , Trustee In Bankruptcy

Plaintiff

• and -

EDWARD JAMES GILBERT, Bankrupt

Edward James Gilbert, appearing in person
Kevin Dias, Esq., Department of Justice for Her Majesty the Queen in Right of Canada As Represented by the Minister National Revenue

HEARD: April 16 , 2012, at Thunder Bay, Ontario

J. dep. Wright, J.

Reasons For Order

[ 1 ] This is a summary administration bankruptcy.

[ 2 ] The bankrupt made an assignment in bankruptcy on 2 March 2011. He now applies for his discharge. The Crown, as represented by the Minister of National Revenue, opposes his discharge of the grounds that the assets of the bankrupt are not of a value equal to $.50 on the dollar on the amount of the bankrupt’s unsecured liabilities, this being a “fact” under section 173(1) of the Bankruptcy and Insolvency Act .

[ 3 ] The bankrupt was in business in the 1980s. He claims that six or seven years after he filed his tax return he was reassessed and more tax was claimed. After many years of dispute and litigation he claims it was determined, and because of his financial circumstances he agreed, that he should have paid an additional $70,000 in income tax. He claims that at some point he offered to pay that amount of money but it was refused. He says that a number of years later, when he did not have the means to pay that sum, the Crown agreed to accept that amount.

[ 4 ] In the meantime, as a result of a combination of heavy penalties, high interest rates and the magic of compounding he now finds himself owing $1,270,132.07.

[ 5 ] The bankrupt is a 61-year-old man. He has no dependents. He was born on May 22, 1950. He is in receipt of a disability pension from the Canada Pension Plan in the amount of $902 per month. He claims not to have worked since 1991. His disability pension will terminate in 2015, 36 months from now. Because he has made few if any payments to the Canada Pension Plan over the past 20 years he anticipates no retirement pension from that source. He claims to have had a stroke, to have suffered from mental problems, back problems, kidney stones, gallstones and cancer. He says he is going into the most recent surgery later this week.

[ 6 ] At the present time the bankrupt is also a beneficiary of what the Crown concedes is a proper discretionary trust created under the will of his late father, Douglas Edward Gilbert, who died on January 25 2009.

[ 7 ] Under that trust he is eligible for two benefits:

a) he has a right to live in his father's former home with the taxes, insurance, repairs, mortgage, interest and any other charges or amounts necessary for the general upkeep to be paid by the estate trustee out of the residue of the father's estate with power to encroach upon capital if necessary, and

b) he has the right to have paid to him or applied for his benefit the whole net income derived from the residue the estate with power to encroach on capital for the purpose of providing medical care expenses and living expenses being food, rental accommodation, utilities, transportation, life insurance premiums and personal income tax owing on the T1 return for the year in which the request for encroachment is made.

[ 8 ] At the present time the payments under (b) above amount to $925 per month.

[ 9 ] The Trustee submits that under the Superintendent’s Guidelines the bankrupt shows “surplus income” which ordinarily must be shared with his creditors.

[ 10 ] Both the Crown and the Trustee agree that if one was calculating “surplus Income” under s.68 the cash being received by the bankrupt being CPP of $902 and trust disbursements of $925 for a total of $1,827 amounts to less than the "poverty line" of $1,926 stipulated in Appendix A-Superintendent’s Standards for 2011.

[ 11 ] If there was no other benefit, and if the application for discharge was being dealt with under S 68 this would end any talk of "surplus income".

[ 12 ] However there are two other considerations. One is the fact that the bankrupt receives another benefit: the right of the bankrupt to reside in his deceased father's former home. Both the Crown and the Trustee submit that this benefit has a value which would be placed on the scale if determining the issue of "surplus income".

[ 13 ] The Crown offers the opinion that an unofficial survey of rental properties leads one to conclude that the average rental for similar properties is in the area of $1,336 per month plus utilities. Since the bankrupt at one time was paying the utilities out of his monetary resources the Crown submits that for purposes of calculating possible "surplus income" the sum of $1,336 should be added to his actual cash receipts of $1,827 for a total of $3,163 per month.

[ 14 ] The Crown submits that under Appendix A this would result in "surplus income" of $1,274 of which $637 per month should be considered "surplus income" to creditors. The Crown submits that a 21 month period would be appropriate for total payment over that term for a total of $13,377 towards his million dollar debt.

[ 15 ] The Trustee accepts the general approach but submits that reasonable accommodation for a man in the circumstances of the bankrupt would be $1,000 which would include utilities. As I understand his calculation this would result in "surplus income" of approximately $900, $450 of which should be considered to be payable to creditors over 21 months for a total of $9,450.

[ 16 ] The other consideration is that, because of the circumstances, the discharge of this bankrupt should not be dealt with under s 68 but rather s. 172.1.

[ 17 ] Since the Crown wants $13,377 and cash flow is obviously a problem for the bankrupt my first thought was to extend the payments for 30 months resulting in a monthly payment of $446 a month.

[ 18 ] The bankrupt then asked to be heard as was his right.

[ 19 ] The bankrupt drew attention to s. 68(2) of the Bankruptcy and Insolvency Act (BIA) which defines "surplus income" for the purposes of that section:

“surplus income” means the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living, having regard to the applicable standards established under subsection (1) [in 2011 that sum is $1,926]

• “total income”

« revenu total »

“total income”

(a) includes, despite paragraphs 67(1)(b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, . . . .; but

(b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, as a gift, a legacy or an inheritance or as any other windfall.

[ 20 ] The bankrupt was content to have his monthly payment from the estate considered part of his "total income" [the alternative, as I understand it, being to have it treated as "after-acquired property" under s. 67 with 100% of it being distributed to creditors] but he objected to having a notional value of his right to reside in his deceased father’s home thrown into the calculation for purposes of determining “surplus income”.

[ 21 ] The bankrupt submits that the benefit in question is a nonmonetary benefit and not a revenue of any nature, certainly not one that has been earned or received by him. Money paid to third parties by the estate trustee for taxes and maintenance expenses with respect to the house accrue equally to the benefit of himself and the residual beneficiary of the house, his aunt, and cannot be said to be a revenue earned or received by him. With respect to payments made towards utilities, until National Revenue attached his payments from the estate he was paying utilities out of his estate receipt. He submits that it is likely this will resume thereby reducing his effective income by some $570 per month.

[ 22 ] The bankrupt further submits that even if a value was attached to his right of residence this value should take into consideration the fact that the residence lies outside of the service area for the city. There is no public transportation in the area. He has the cost of maintaining appliances in the house, a cost he would not have if he was in a commercial apartment or public housing. He also has the other expenses of a homeowner such as lawn care, snow removal, window washing, etc.

[ 23 ] The issue has not been referred to mediation that I am aware of.

[ 24 ] Counsel for the Crown replies that the definitions referred to in s. 68 apply to the superintendent as guidance in establishing standards for determining surplus income. He submits that the present proceedings are not being brought under s. 68 but rather under s. 172.1 which provides:

Exception — personal income tax debtors

172.1 (1) 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, the hearing of an application for a discharge may not be held before the expiry of

• (a) if the bankrupt has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction,

(i) 9 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68 to the estate of the bankrupt at any time during those 9 months, or

(ii) 21 months after the date of bankruptcy, in any other case;

• (b) if the bankrupt has been a bankrupt one time before under the laws of Canada or of any prescribed jurisdiction,

(i) 24 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68 to the estate of the bankrupt at any time during those 24 months, or

(ii) 36 months after the date of bankruptcy, in any other case; and

• (c) in the case of any other bankrupt, 36 months after the date of the bankruptcy.

Appointment to be obtained by trustee

(2) Before proceeding to the trustee’s discharge and before the first day that the hearing could be held in respect of a bankrupt referred to in subsection (1), the trustee must, on five days notice to the bankrupt, apply to the court for an appointment for a hearing of the application for the bankrupt’s discharge.

Powers of court to refuse or suspend discharge or grant conditional discharge

(3) On the hearing of an application for a discharge referred to in subsection (1), the court shall, subject to subsection (4),

• (a) refuse the discharge;

• (b) suspend the discharge for any period that the court thinks proper; or

• (c) require the bankrupt, as a condition of his or her discharge, to perform any acts, pay any moneys, consent to any judgments or comply with any other terms that the court may direct.

Factors to be considered

(4) In making a decision in respect of the application, the court must take into account

• (a) the circumstances of the bankrupt at the time the personal income tax debt was incurred;

• (b) the efforts, if any, made by the bankrupt to pay the personal income tax debt;

• (c) whether the bankrupt made payments in respect of other debts while failing to make reasonable efforts to pay the personal income tax debt; and

• (d) the bankrupt’s financial prospects for the future.

Requirements if discharge suspended

(5) If the court makes an order suspending the discharge, the court shall, in the order, 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.

Court may modify after year

(6) If, at any time after the expiry of one year after the day on which any order is made under this section, the bankrupt satisfies the court that there is no reasonable probability that he or she will be in a position to comply with the terms of the order, the court may modify the terms of the order or of any substituted order, in any manner and on any conditions that it thinks fit.

Power to suspend

(7) The powers of suspending and of attaching conditions to the discharge of a bankrupt may be exercised concurrently.

Meaning of “personal income tax debt”

(8) For the purpose of this section, “personal income tax debt” means the amount payable, within the meaning of subsection 223(1) of the Income Tax Act without reference to paragraphs (b) to (c), by an individual and the amount payable by an individual under any provincial legislation that imposes a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, including, for greater certainty, the amount of any interest, penalties or fines imposed under the Income Tax Act or the provincial legislation. It does not include an amount payable by the individual if the individual is or was a director of a corporation and the amount relates to an obligation of the corporation for which the director is liable in their capacity as director.

• 2005, c. 47, s. 105;

• 2007, c. 36, s. 53.

Facts for which discharge may be refused, suspended or granted conditionally

173. (1) The facts referred to in section 172 are:

• (a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible; . . .

[ 25 ] In other words, a debtor who falls within s. 172.1(1) does not have a right to receive an absolute order of discharge.

[ 26 ] The Crown submits that quite apart from technical calculations of "surplus income", the court, applying the powers set out in s. 172.1(3) may require the bankrupt, as a condition of his or her discharge, to pay any monies that the court directs. In determining what order to make the court may consider what the bankrupt has called "nonmonetary benefits”.

[ 27 ] I note that subsection (4) sets out factors which the court must take into account. In doing this I have little information as to the circumstances of the bankrupt at the time the personal income tax debt was incurred in the mid-1980s. I have received information as to the efforts made by the bankrupt to ascertain the proper amount owing and I accept his statement that at one point he was ready willing and able to pay the principal amount owing for taxes being roughly $70,000 but that this was rejected and the grounds that a far larger sum was now payable as result of penalties and interest accrued. I have no information that the bankrupt made payments in respect of other debts while failing to make reasonable efforts to pay the personal income tax debt. As for the bankrupt's financial prospects for the future I can only say that they are bleak. His disability pension will cease in 36 months at the age of 65. I have no knowledge of the extent of his father's estate but I can take notice of the fact that capital is producing a very small return by way of interest in today's economy.

[ 28 ] One would think that it would be in his interest to have the family home sold, the proceeds invested and the income paid to him and that he seek admittance to public housing.

[ 29 ] To the extent that the trustee was under an obligation to ascertain "surplus income" I have concluded that his "right of residence" is not a benefit to be considered in that calculation. It is not a revenue. It is the amelioration of an expense.

[ 30 ] On the other hand, the absence of an expense normally borne by people in his position is a factor which the court may consider in exercising its discretion under s.172.1. Having done so I find that the exercise of the right of residence also involves him in expenses that another person of his age with full shelter costs for an apartment in an urban area would not have.

Conclusion:

[ 31 ] Because the bankrupt has $200,000 or more of personal income tax debt and of this personal income tax debt represents 75% or more of the bankrupts total unsecured proven claims, s. 172.1 is triggered and S. 68 does not apply.

[ 32 ] Under s. 172.1 the debtor may apply for discharge on the expiry of nine months following the discharge if he has not previously been bankrupt and no other order for payment has been made under s. 68.

[ 33 ] It is now over nine months since the date of bankruptcy. The bankrupt has applied for discharge.

[32] Under s. 172.1 (3) the general rule on the hearing of the application for discharge is that the court shall require the bankrupt, to do one of the specified things, one of which is to pay money. The court has a wide discretion in determining disposition under s. 172.1.

[33] Having considered the factors in subsection (4), the age, prospect and submissions of the bankrupt and taking into account a notional value of $650 of his right of residence which I accept is the amount a man in his condition would expect to pay for shelter (plus utilities) in an urban setting, I have concluded that the debtor’s discharge should be conditional upon him paying the sum of $325 per month for 10 months commencing the 1 June 2012.

__________ ”original signed by”_ ___

The Hon. Mr. Justice J. deP. Wright

Released: April 30, 2012

COURT FILE NO.: 11-14690039

DATE: 2012-04-30

ONTARIO SUPERIOR COURT OF JUSTICE In the matter of the bankruptcy of Edward James Gilbert of the City of Thunder Bay in the District of Thunder Bay in the Province of Ontario B E T W E E N: BDO CANADA LIMITED, as Trustees of the Estate of Edward James Gilbert, Plaintiff - and – EDWARD JAMES GILBERT, Bankrupt REASONS FOR ORDER J. deP. Wright J.

Released: April 30, 2012 (final)

/mls