COURT FILE NO.: 31-1183437
Reasons released: 20120712
SUPERIOR COURT OF JUSTICE – ONTARIO
(IN BANKRUPTCY and INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY of ANDREW ROBB KINNAIRD of the City of Thornhill , in the Province Of Ontario, Bankrupt
BEFORE: Registrar D.E. Short
COUNSEL: Miles D. O’Reilly, Q.C. for the Bankrupt
Carl Ritchie for the Trustee
Maria Vujnovic for Canada Revenue Agency
HEARD: July 11, 2012
ENDORSEMENT
I. Opposed Discharge Issues
“In this World nothing can be said to be certain, except death and taxes.”
- Benjamin Franklin (1789)
[1] Although this proposition has generally been accepted for over 200 years, the Bankrupt, in this case, for over ten years seems to have taken a contrarian view.
[2] As a consequence he only rarely filed his income tax returns and apparently is in arrears with respect to filing 31 GST & HST returns.
[3] All along, he was employed as an independent contractor, a real estate commission salesman.
[4] For over twenty years he has been associated with various brokers, generating commissions on the purchase and sale of residential real estate properties.
[5] It seems he had an aversion to filing annual tax returns and never adopted the habit of making quarterly instalments on account of anticipated income tax payable in any year.
[6] No tax was deducted at source, as he was treated as an independent contractor. Further, although HST was collected on commissions earned by him, he did not complete GST or HST returns. CRA apparently has determined the probable amounts owing, from Income Tax Returns that were from time filed by Mr. Kinnaird.
II. How could this continue for over ten years?
[7] The statement of arrears filed before me suggests that the returns for 2002 – 2003 – 2004 and 2005 were submitted such that notices of assessment for those years were generated in 2007. 2006 and 2007 were assessed as of December first, 2008, with the 2008 return being assessed on April 15, 2009. (ex.2)
[8] Mr. Kinnaird made a Division I proposal on March 27, 2009 and ultimately was placed in bankruptcy on March 22, 2011. More on that aspect will be addressed below. Suffice it to note that 2009 and 2010 returns were filed. The Statement of Account reflects annual outstanding balances for tax still owing ranging from $0 in 2002 to $34,562.30, owing for the 2004 taxation year.
[9] The total tax portion of the claim for income tax amounts to $177,032.20.
[10] However, interest and penalties accrued to the date of bankruptcy totalled $117,276.20 for a total claim of $294,308.40.
[11] The GST/HST account has a principal claim of $51,617.12 and interest of $20,882.56 for a total of $72,504.68.
III. Consequences of Ostrich Strategy.
[12] I was surprised that such indebtedness could be allowed to continue for so long while the bankrupt was continuing working. It seems he was burying his head in the sand of the Beach and hoping the problem would go away.
[13] The result, however, was that, rather than CRA and Mr. Kinnaird working out a proposal to get him out from under an intolerable debt load, CRA undertook the issuance of garnishment of future earnings by way of Directions to Pay issued to the Real Estate Brokerages for whom he was working over the years.
[14] This meant that 60% [!] of his income was being seized and applied to the oldest debt, with taxes owing being paid, and then, accrued interest and penalties for the oldest years, before applying anything to subsequent years.
[15] Thus, CRA was obtaining a high rate of return on the outstanding balances (at least to the extent they were being recovered).
[16] The result was that, for example, the 2004 principal of $34,562.30 had accrued total interest and penalties of $42,980.72 by the March 2011 date of bankruptcy.
[17] So in 2009 when he put forward his proposal Mr. Kinnaird owed roughly $250,000.00 with a history over the previous ten years of earnings only giving rise to an average of less the $30,000.00 in tax payable each year.
IV. Future Earnings
[18] Those earnings would seem to be contingent on the bankrupt being able to continue to earn his living from real estate transactions (and the market continuing to generate sales at a similar level).
[19] However, his license requires renewal in September of this year. The application for renewal asks if the applicant is bankrupt.
[20] The renewal process is said to be discretionary and Mr. O’Reilly has brought this application for a prompt discharge to facilitate the renewal process so Mr. Kinnaird can continue to earn a livelihood.
V. “Tax Driven Bankruptcy”
[21] CRA’s counsel pointed me to Section 172.1 of the Bankruptcy and Insolvency Act. This Bankrupt has more than $200,000.00 in personal income tax debt and that tax owed is over 75% of the total unsecured claims.
[22] Under S. 172.1(3) the court on such an application shall
(a) refuse the discharge;
(b) suspend the discharge for a period court thinks proper; or
(c) require the bankrupt to perform any acts, pay amounts or consent to judgment or comply with other terms.
[23] I accept this provision would prevent the granting of an absolute discharge in such a case. In any event I would not consider such a discharge in a case such as this.
[24] However, subsection (4) requires I craft an order looking at circumstances of the bankrupt when the debt was incurred, efforts made to pay, whether other debts were paid instead of tax debts and the bankrupt’s future financial prospects.
[25] I am disappointed with the manner Mr. Kinnaird got himself into this predicament. But he was not using the money for other purposes – 60% of his income was often being taken to apply to old tax.
[26] I am disappointed with CRA’s approach of failing to follow up aggressively on the 2009 proposal. Similarly, the Trustee’s office seems to have let this matter drift for 2 years.
[27] Ultimately, CRA failed to collect any funds from 2009 to 2011 by virtue of collection activity being suspended as a result of the pending proposal.
[28] No counter proposal was made by CRA in response to the $40,000.00 offer made in the proposal prepared in 2009.
[29] There is no surplus income (there are child support obligations with respect to a young child).
[30] Had the proposal been accepted $750 per month would have been paid to the trustee over the past two years.
VI. Consent to Judgment?
[31] Mr. O’Reilly asks that I grant a discharge, conditional on a consent to judgment in favour of the trustee for $20,000.00.
[32] The trustee objects on the basis that such a result will give rise to ongoing collection problems having regard to Mr. Kinnaird’s approach to various other payment obligations.
[33] Mr. Kinnaird says he has hired an accountant and has provided of directions given to his broker/employer for remittance of HST and quarterly income tax instalments.
[34] CRA seeks as much as 50% but recognizes the need to allow the bankrupt to get out of his self inflicted quagmire and counsel has identified a number of conditions which I find helpful.
[35] In her useful brief of authorities, CRA’s counsel includes two cases particularly relevant to this case.
[36] In a very recent decision (June 28, 2012) in Re Case 2012 NBQB 220 the bankrupt owed about $220,000.00 in taxes but he had been working outside Canada and was acting on erroneous professional advice that the foreign income was not taxable in Canada. Registrar Bray in that decision cites Re Furlotte (2007) 289 N.B.R. (2d) 218 for the principle that even in the absence of criminal evasion the Bankrupt had responsibility to give a convincing explanation both for his refusal to meet his obligations pursuant to the Income Tax Act.
[37] In Re Case the court made a conditional order suspending the discharge 24 months to provide for potential surplus income payment to or in the alternative permitting a consent to judgment in the amount of $20,000.00.
[38] Conversely in Re Paine [2011] B.C.J. No. 417, District Registrar Cameron saw fit to award approximately 50% of the tax debt. At a paragraph of his reasons he commented on this amount and cited Bankruptcy of Pinc 2007 B.C.J. 569.
“This is an onerous condition, to be sure, but it bears repeating that this entire affair arose through Mr. Pinc’s avoidance of 10 years’ taxes, and, with perhaps the only enduring positive observation ever made on income taxes Oliver Wendall Holmes Jr. said it best: “I like to pay taxes. With them I buy civilization.”
VII. Disposition
[39] With respect to my British Columbia colleagues, I am not prepared to accept the wisdom, in a case where rehabilitation is sought, of ordering what is likely to be an unbearable conditional debt obligation.
[40] I adopt rather a factor of 10% of the tax principal outstanding, as a reasonable basis of balancing the need for rehabilitation with the need to address the need to make a contribution to civil society.
[41] I therefore add $177,032.20 and $51,617.12 reach $228,600.00. One tenth of that comes to $22,860.00. I am not, however, willing to direct a consent to judgment as a condition but rather feel the circumstances and history of procrastination dictate that the sum of $22,860.00 be paid to trustee as a condition of this discharge. I am not directing any period of suspension as I feel the failure to process the proposal efficiently has caused enough delay already.
[42] The Discharge of Mr. Kinnaird shall thus take effect upon performance of the following conditions:
Pay $22,860.00 to trustee;
Provide the trustee with evidence of payment of proper quarterly installments for 2012;
File all outstanding GST returns;
Provide written undertaking to Trustee to pay any tax owing on post bankruptcy income tax return for 2011 within 60 days of date of issuance of Notice of Assessment by CRA.
[43] It is my hope that Mr. Kinnaird will now see the wisdom of keeping his filings and payment current and that this decision will give a more “certain” outcome for CRA and the Trustee.
Released July 12, 2012 _____________________ Master D.E. Short,
Registrar in Bankruptcy
B3