SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 31-1134611
HEARD: 20130425
RELEASED: 20130830

IN THE MATTER OF THE BANKRUPTCY OF

ROBERT JOHN APENIS

OF THE TOWN OF CONCORD, IN THE PROVINCE OF ONTARIO

APPEARANCES:

For the Bankrupt
Kenneth Page, fax 416-595-1731
Lawrence Ben-Eliezer, (Charter issues) fax 416-364-0800

For Canada Revenue Agency (opposing creditor)
Kevin G. Dias,
Arnold H. Bornstein, (Charter issues) fax 416-973-0810

No one appearing for discharged Trustee

BEFORE: MASTER D. E. SHORT, Registrar in Bankruptcy

HEARD: April 25, 2013

REASONS FOR DECISION

Unintended Consequences

[1] In 2005, a casual conversation with an accountant at a social event led Robert Apenis to believe he might have a problem. He did.

[2] A very significant problem it turns out. In his evidence before this court Mr. Apenis testified that very significant business losses were suffered by a corporation in which he held an ownership interest a number of years prior to 2005. He believed that as a result of the carrying forward of those economic losses he would not be required to file income tax returns for a number of years as that income could be set off against the earlier losses of the business.

[3] Regrettably for him, his assumption was wrong. When he was alerted to the possibility of this situation he filed tax returns for a number of years. That resulted in reassessments by the Canada Revenue Agency which together with interest and penalties led to a claim by CRA in his bankruptcy for the total sum in excess of one million dollars.

I. Contested Discharge

[4] A Contested Discharge hearing was scheduled by the Trustee in this case as a result of a creditor’s objection filed pursuant to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

[5] The Bankrupt testified that he originally expected a summary proceeding that would see him discharged in nine months. As a result of the extensive delays encountered and his difficulty in establishing the case he had to meet, his counsel argued before me that his rights under section 7 of the Charter of Rights and Freedoms had been violated and that this court had a duty to remedy the matter.

[6] Conversely counsel for the Canada Revenue Agency (“CRA”) vigorously argued that the Charter does not protect economic rights and that in this case by virtue of the size of the tax arrears, a significant payment by the bankrupt ought to be ordered as a condition of any discharge.

I was thus required to weigh, not only the facts presented before me, but also to consider the possible evidence that was not lead together with any applicable statutory constraints on the discretion which I would otherwise be entitled to exercise.

II. Background

[7] Mr. Apenis filed a General Assignment in Bankruptcy, on or about November 21, 2008.

[8] For a number of years he has been seeking a discharge from bankruptcy. When the expiry of the initial 9 month automatic discharge period under the then current legislation was approaching, the Canada Revenue Agency (“CRA”) advised that it intended to oppose the bankrupt’s discharge.

[9] A number of uncommon developments occurred in the course of his estate’s administration and related procedural events.

[10] As a consequence the bankrupt, sought an order pursuant to section 24 (1) of the Canadian Charter of Rights and Freedoms striking or, in the alternative, staying the opposition filed by CRA as the result of the infringement of his right to life, liberty and security of the person as guaranteed by section 7 of the Canadian Charter and Rights and Freedoms, and such further and other relief as to this Court may seem just.

[11] Mr. Apenis filed an affidavit in support of his application upon which he was cross-examined over two days resulting in an extensive transcript.

[12] While there clearly were questions to be answered in the early stages of this matter, by the time it got to me there appeared to be no evidence led before me to contradict the bankrupt’s evidence on how the debts that gave rise to his bankruptcy arose and the considerations he undertook prior to filing for bankruptcy. His company suffered legitimate business losses. Those losses however were not available to him by virtue of the business structure he utilized.

III. Early Matters

[13] The bankrupt deposes that the decision to file for bankruptcy was a difficult one for Mr. Apenis, particularly given the importance he placed on his “good name”.

[14] Acting on the recommendation of a long-time friend, Mr. Apenis retained Harris & Partners Inc. to act as Trustee in Bankruptcy. Mr. Harris informed Mr. Apenis that although the amount of the debt, which consisted principally of monies owed to CRA, was large, the bankruptcy itself would be simple and would take approximately nine months.

[15] Mr. Apenis states he made full and frank disclosure of his financial affairs before filing for bankruptcy and there after cooperated with all requests made of him to amplify and clarify the said disclosure.

[16] The bankrupt testified that at a meeting of creditors convened at the request of CRA Mr. Apenis provided Ms MacDougall, an investigator with the CRA, with information he had already disclosed to Mr. Harris as part of the bankruptcy filing process. Mr. Apenis says he followed up on this oral disclosure with an email containing detailed information regarding issues raised by Ms MacDougall as well as additional information that he thought might interest CRA. Mr. Harris did not attend or give evidence on the discharge hearing.

[17] In or about the month of July 2009, Mr. Apenis learned from Mr. Harris’s office that the trustee had filed an objection to Mr. Apenis’ discharge from bankruptcy on the grounds of an unsatisfactory accounting. Mr. Apenis subsequently learned that Mr. Harris had contacted the C.R.A to remind that agency to also file an objection to his being discharged from bankruptcy.

[18] Over the ensuing three years, Mr. Apenis made numerous efforts to ascertain the grounds upon which Mr. Harris and the C.R.A. were asserting that there had been a failure to make a satisfactory accounting.

[19] Despite these written requests, Mr. Apenis did not receive any disclosure of these grounds.

IV. Previous Discharge Hearings

[20] Mr. Apenis first discharge hearing took place on or about November 24, 2009. The hearing was adjourned sine die because a conflict of interest by the presiding Deputy Registrar.

[21] After the conclusion of that hearing and in order to expedite matters, Mr. Apenis agreed to let the C.R.A. examine him under oath on December 1, 2009 in order to address issues related to the accounting he had provided. Mr. Apenis did so voluntarily.

[22] The next scheduled discharge hearing took place on or about May 5, 2010. On or about January 19, 2010, Mr. Apenis again wrote to Counsel for the C.R.A. requesting the disclosure of the particulars of the allegations against him regarding an unsatisfactory accounting. He repeated that request on May 3, 2010. Mr. Apenis asserts he did not receive any reply from the C.R.A to these two requests.

[23] At the hearing held May 5, 2010 before Registrar Nettie, In Bankruptcy (hereinafter referred to as “Registrar Nettie”), Counsel representing the C.R.A for the first time produced documentation as evidence that Mr. Apenis had failed to make a satisfactory accounting by concealing certain assets and in particular an aircraft. In addition to counsel for the C.R.A putting forward these documents Ms MacDougall advised Registrar Nettie from the well of the court that the Federal Minister of Transport was in possession of documents confirming that Mr. Apenis was an owner of the airplane in question.

[24] The factum filed on the bankrupt’s behalf on the Charter issue asserts:

None of these documents was produced to the court. Further, none of the evidence tendered by Ms. MacDougall or Counsel had been disclosed to Mr. Apenis at any time prior to the May 5, 2010 hearing. Finally, none of the evidence was tendered through testimony given under oath.

[25] The factum continues:

Mr. Apenis was surprised and, it is respectfully submitted, ambushed by this procedure. As the result of being unable to afford counsel and having been denied coverage by Legal Aid Ontario, Mr. Apenis was left to fend for himself. Upon hearing the unsworn allegations made by counsel for the C.R.A and Ms. MacDougall, Registrar Nettie adjourned the discharge hearing sine die and ordered that a hearing be held to determine the ownership of the airplane on May 10 and 13, 2009. After the latter hearing, Registrar Nettie ordered that the airplane be seized.

[26] Registrar Nettie ultimately determined that Mr. Apenis was not an owner of the airplane and that Mr. Apenis never held an ownership interest in the airplane. The factum continues in this regard:

Further, all particularized allegations that Mr. Apenis has concealed assets or otherwise failed to make a satisfactory accounting have been disproved.

[27] It was submitted before me that the delay in having a discharge hearing has been occasioned principally by the failure or the refusal of the C.R.A. to provide full and timely disclosure of the evidence upon which it relies in support of its still unsubstantiated assertion that Mr. Apenis has failed to make a satisfactory accounting. This delay is alleged to have also caused Mr. Apenis substantial embarrassment and emotional hardship. He deposes that it has also caused substantial damage to his relationships with his family, friends and former business associates.

V. Analysis

[28] I find that no valid reasons in this case were established at the hearing before me to justify an outright refusal of a discharge. Conversely, I was not satisfied that sufficient grounds were established by way of the constitutional arguments to justify simply granting an unconditional discharge or otherwise annulling the bankruptcy.

[29] It seems a common practice of Canadian courts, to exercise their discretion in so called “tax-driven” bankruptcies so as to require a percentage of an established tax debt be paid as a condition of the granting of a discharge. What varies is widely is the determination of an appropriate percentage to establish. In my opinion, the determination of what portion is appropriate to establish is largely driven by the unique facts of each case. (viz.: Re Baran, 95 C.B.R. (5th) 261;[2013] 2 C.T.C. 125;[2013] G.S.T.C. 4;2013 CarswellOnt 136)

[30] In Baran I examined the response by CRA to the taxpayer’s initial objection to the assessment by the CRA auditor. There the Appeals Division of the Canada Revenue Agency wrote to acknowledge receipt of her objection and to advise as follows:

"The review will be done by the Appeals Division of the Canada Revenue Agency, which has a mandate to conduct a full and impartial review of the decision taken by CRA officers.”

[31] As described at paragraph 35 of those reasons, in that case the Appeals Divisions letter advised that an appeals officer would be contacting the taxpayer to review all the facts and discuss her objection and to ensure that the basis of the reassessments was understood. As well, it was indicated that there would, at that future point in time, be “an offer to provide the taxpayer with the documents relating to the issue(s) in dispute.”

[32] This seems to be the only fair and reasonable way to allow a taxpayer to know the case they have to meet in the case of an objection by them to an assessment made by CRA.

[33] In Re Baran I expressed my view that a duty of fair dealing obligation and duty to the taxpayer continues despite a bankruptcy and throughout the discharge process.

[34] Here Mr. Apenis continually sought information so that the basis of the opposition to his discharge could be understood. CRA clearly took the position before me that there was no obligation whatsoever on them to provide specifics or even an indication of the supporting documentation relied upon with respect to any notice of objection filed by them.

[35] In view of that position, in this case I made an order requiring the attendance of a CRA representative to be examined prior to the discharge hearing and directing production of the documentation relied upon. In doing so I was exercising my powers given to me under Section 192 (1) (k) of the BIA, in particular, as well as the other applicable subparagraphs of that section.

[36] Counsel clearly indicated to me during the hearing of this matter that, but for that order, they would have continued to feel no obligation to provide specifics of the case the bankrupt had to meet prior to the discharge hearing.

[37] Clearly I find that position contrary to my sense of fair play and justice.

[38] But is it contrary to the provisions of the Charter of Rights and Freedoms?

VI. What is to be done?

[39] Owing to time constraints I was only able to hear the Charter arguments on the first day of hearing arguments regarding the discharge of Mr. Apenis. The matter was adjourned with the hope that I would have an opportunity to provide detailed reasons on the Charter argument prior to hearing submissions with respect to the terms of any discharge (in the event I did not accept the Charter argument). Other responsibilities prevented by completing any written reasons on the Charter issues prior to the second portion of the bifurcated hearing.

[40] At the conclusion of the second day I indicated to counsel that I had a desire to not delay this matter any further than was necessary and that I was inclined to simply deliver brief oral reasons oral reasons with respect to the entire matter at that time.

[41] A new court recording system has been implemented and in part as an experiment I delivered a brief statement of my conclusions in this case to counsel and the bankrupt with the understanding that once the typed transcription was available I would have an opportunity to edit my oral reasons for grammatical and syntax issues.

[42] The typed reasons were unfortunately delayed in their preparation and having read them, I felt the need to provide further the foregoing extensive preamble and to expand and clarify the specific terms and conditions of the conditional discharge that I contemplated during the ultimate oral hearing in this case.

[43] It is not to diminish my appreciation of the quality of the advocacy and the potential importance to future cases of the Charter arguments made before me, that I have not set out in any detail the cases cited and arguments presented before me by counsel on both sides. The application of the Charter to bankruptcy matters such as this will have to wait for another day.

VII. Reasons

[44] The essence of the oral reasons originally delivered is set out in the following edited and supplemented extracts. In part they amplify and perhaps foreshadowed what preceded this section of my reasons

[45] “I apologize that I wasn't able to complete any meaningful set of Reasons with respect to the Charter arguments. Both counsel on the previous occasion professionally and very competently addressed a number of issues and I had to think about it and over the last month. I've been thinking about it in terms of whether or not this is the kind of case where a Charter Ruling is appropriate.”

[46] I am not satisfied that I do not have the jurisdiction to make a ruling on the Charter matter, but I don't think it is necessary because even if I had jurisdiction, I would have applied proportionality and my real a desire to bring this matter to a conclusion, rather than having Mr. Apenis waiting for trips to higher level courts, when really what he says he wants and what I believe he wants, is simply to bring this pain to an end.

[47] So, it would therefore be my Ruling that the Charter provisions that were raised by his counsel and the cases that they relied on were insufficient to convince me that this matter ought to be, in effect, dismissed or otherwise brought to an end on the basis of Charter arguments.

[48] However, I am sympathetic to the argument that says that, when someone appears before this Court, they are always entitled to know the case they have to meet. Counsel for CRA, on this occasion and the previous occasion; basically took the position that until the hearing happens, unless a court orders otherwise, there is no obligation to provide particulars to the defaulting taxpayer of the grounds upon which the taxing authority is relying.

[49] I recognize this process is intended to be a summary one. I do not accept that means that what our courts would normally regard as within the concept of procedural fairness is somehow to be ignored when particulars are sought of the grounds for opposition to a discharge.

[50] I don't think that's fair. I appreciate that in most cases nobody asks for them. However usually that is because they already know the specific issue to be addressed.

[51] Here it was admitted by the objecting creditor before me that as of the opening of the argument no further evidence to support the opposition were being relied upon.

[52] In this case Mr. Apenis, under oath, numerous of times, has said he was concerned that he didn't want to be, for lack of a better word, “blindsided”. He expresses concerns that he had with respect to the airplane issues and the way people in other cases before my predecessor were being dealt with on charges of contempt and otherwise.

[53] He previously tried to get an examination of a CRA representative but relied upon the wrong section, (one of the disadvantages of being a self-represented litigant). He's incurred a lot of legal costs and I think a lot of lawyers have volunteered some of their time, whether intentionally or otherwise.

[54] It is argued that the Act is silent with regard to any stated requirement of an opposing creditor to make any disclosure whatsoever of particulars prior to the discharge hearing. However, I observe that the legislation does not say that there is no obligation to make production of the remaining grounds of opposition prior to the discharge hearing.

[55] So that brings me really to saying “alright, what's to be done?” And I think in this case the costs and the aggravation and the time not being out of bankruptcy has some value. How you value a “justice delayed is justice denied” concept when it is a delay with respect to establishing the basis upon which the bankrupt gets to get on with his life, is a difficult concept. Mr. Apenis says he's lazy sometimes and he doesn't deal with details etc.

[56] He's not the only one in the world who's like that, but, he had, I believe, an obligation to be more careful about determining whether or not he was able to assume that he was in a tax-free zone for twenty years, going through taxable income in $450,000 range in the early 2000's, in 2001 and 2002, and not paying any tax.

[57] It appears he knew that there was a problem in 2005, because he went to the voluntary disclosure program. After that he had all the delinquent tax returns put together. It looks like they were all filed on October the 26th 2006.

[58] I am giving him the benefit of the doubt with respect to the 2005 taxation year, which would have added another $99,000 of principal to the “post disclosure” incurred tax debt. That still means after he knew there were no available deductions for the previous corporate losses against his earned income for the two years of 2006 and 2007, which, by my math, resulted in principal tax obligations for those years totalling $105,120.42.

[59] A payment to the trustee of that amount to the trustee is a condition I am establishing for his discharge. I am coming to that sum because that amount, I think, ought to be paid in full because it has absolutely nothing to do with the basis upon which Mr. Apenis asserts that he thought he had an on-going tax credit for corporate losses such that his tax otherwise payable would have been eliminated by those losses.

[60] Now with respect to the treatment of the earlier, mistakenly ignored tax debt, counsel for CRA provided me with a comparison between the fact situation here and the fact situation in the British Columbia case, Van Ngyuen. There the court was prepared to establish a condition of a payment as high as sixty per cent of the outstanding tax debt. I am looking at a percentage that might be significantly lower, with a view giving the benefit of all sorts of doubts.

[61] Here when I subtract the $105,120.42, dealt with above, from the principal portion of the tax claimed, I reach $1,225,829 as the gross outstanding principal portion of the tax debt.

[62] To recognize the problems I have identified above with respect to disclosure and delay and the other issues generally identified by the bankrupt I’ve come to an adjusted percentage which I think is appropriate in this case.

[63] I have determined not to take the sixteen per cent figure which is the average of all the case that's provided in the case list filed by CRA and identified at the hearing as Document 21, I have rounded the percentage to be used down to fifteen per cent.

[64] Applying the 15% to the $1,225,829 calculated above I reach an amount of fifteen per cent of the million two-twenty five balance that's left, which comes to $183,874.44.

[65] For simplicity I round the conditional amount down to $105,000 and the tax percentage component down to $183,000.

[66] So, $288,000 is the total amount that is to be potentially payable going forward.

VIII. Amounts to be Paid

[67] In my view the payment of these two components requires some creativity.

[68] The $105,000 component is to be paid is a condition of the discharge the bankrupt.

[69] The Bankrupt is required to be up-to-date on the filing of his annual tax returns as of the date of payment of the $105,000 amount.

[70] With respect to the $183,000 component I have modified my disposition after reflecting on the matter and the transcript of my remarks following the completion of the arguments in this case.

[71] On the basis detailed below, the Bankrupt is to undertake to pay to a trustee five per cent of his reported taxable income for each of the 10 taxation years (commencing with his 2013 personal income tax return) on May the 30th of the immediately following calendar year. So on May the 30th of 2014, which will be the first year, five per cent of his filed 2013 taxable income.

[72] The intent is further that Mr Apenis will pay the trustee any further amount determined following CRA’s determination of his assessed taxable income. This calculation is to be based on the amount computed and recorded on the present tax return form as “taxable income” at line 260.

[73] At the hearing we discussed securing a form of this obligation by way of a judgment in favour of CRA. Upon reflection, unless counsel can convince me otherwise, I believe that I am obligated to ensure that all creditors are treated equally. Thus, unless all the minor unsecured creditors provide their consent, I think the judgment needs to be in favour of a trustee.

[74] The bankrupt is required to file all personal tax returns on time. He is also required to remit going forward needs to remit quarterly instalments, if and when appropriate.

[75] Upon reflection and in the course of considering a fair conclusion for the bankrupt I have determined that a sunset provision needs to be added with respect to the $183,000 obligation. The components I am directing are:

1. Mr Apenis will calculate his line 260 net income amount for each year commencing with the 2013 tax year;
2. 5% of that amount will be remitted to the trustee for CRA by May 30 of the immediately following year;
3. when the CRA notice of assessment is received, a copy will be provided to the trustee together with payment of any adjusted amount within 60 days of the date of the notice of assessment;
4. any delinquent amounts will bear interest at the post judgment interest rate presently in effect;
5. The maximum amount to be paid on account of the principal obligation is $183,000. The obligation is open and may be paid in full at any time;
6. the total amount payable under this obligation is the lesser of $183,000 and the total of the required payments for the 10 taxation years ending with the 2023 taxation year;
7. if Mr. Apenis does not have sufficient income to result in the full $183,000 being paid, any remaining balance will be “forgiven” upon payment in full of the 10 taxation year assessed amounts and any accrued interest owing;
8. A consent to judgment with respect to the foregoing terms in a form acceptable to counsel for CRA and the bankrupt will be executed as a further condition of the bankrupt’s discharge.

[76] As the previous trustee has been discharged the above arrangements will be binding on any new trustee appointed. If the parties could work out a more efficient scheme of payment and distribution I will be willing to consider any reasonable proposal.

IX. Disposition

[77] Section 12 of the Interpretation Act, R.S.C., 1985, c. I-21 guides the interpretation of all the statutes raised before me on this matter:

“Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.”

[78] I believe the guidance of this provision is reflected in the resolution dictated by my decision.

[79] While not in force at the time this bankruptcy commenced, Section 172.1 (4) is the portion of the legislative landscape which clearly resonates with regard to the individual before this court. Under that subsection the court is required to consider four factors. My determination, based on the evidence before me results in the conclusions set out below:

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

• The bankrupt endeavoured to succeed with a large commercial project. It failed. He suffered substantial losses. He wrongly believed that those losses could be set-off against future income until he was in a net positive position. He learned he was wrong. When he did find out he took steps to address the situation.

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

• The bankrupt endeavoured to address his obligations but was unable to negotiate a resolution and filed for bankruptcy. His failure to pay any income tax after the problem was identified is addressed in the condition established for his discharge.

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

• There was no evidence before me of any intent by the bankrupt to knowingly fail to address his tax obligations prior to the discovery of his misunderstanding of the law.

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

• This point requires additional consideration. Mr. Apenis clearly has numerous contacts in the business community. His bankruptcy has caused great harm to those connections but I am hopeful that he will be able to re-establish himself. He appears to be a bright, creative individual and might well be in a position in the future to make the full payments which have been ordered in this case. However, there is no certainty of that eventuality and I believe it would be inappropriate to create an anchor that would overly restrict the launching of any future business initiatives.

[80] In the circumstances I am making no order as to costs.

[81] At the hearing of this matter, at the conclusion of my “oral reasons” I indicated on the record that a conditional discharge was granted. The conditions are as now set out in these typed of reasons.

[82] Because I was particularly concerned that there would probably be some modification in the course of dealing with the transcribed oral reasons, I made it clear to counsel that the time period for appealing my decision would run from the date of the release of the typed reasons. As a consequence so that there is no misunderstanding the appeal period will run from Friday, August 30th, 2013.

[83] This was a difficult case for the bankrupt and has been a difficult case for me to decide. I’m obliged to all counsel involved for their skilful advocacy and their assistance and patience throughout this matter.

Master D. E. Short
Registrar in Bankruptcy

August 30, 2013

DS/ B. 11