SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 31-1518342

HEARD: 20130109
RELEASED: 20130111

In the Matter of the Bankruptcy of Titania Baran

of the Town of Vaughan, in the

Province of Ontario

Summary Administration

APPEARANCES:
Kenneth Page -for the Bankrupt fax 416-595-1731

Melanie Wengle -for the Trustee fax 416-496-9651

Nathalie Hamam for Canada Revenue Agency,
(opposing creditor) fax 416-973-0810

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

HEARD: January 9, 2013

REASONS FOR DECISION

I. Contested Discharge: Section 172.1

[1] A Discharge hearing was scheduled by the Trustee in this case pursuant to the mandatory requirement of Section 172.1 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

[2] The application of the provisions of that section created difficulties in light of the evidence presented before me in this case.

[3] This is a Summary Administration matter. In the Trustee’s representative’s submissions before me, it was suggested that, but for the existence of Section 172.1, it would be probable that this case would have likely been processed as an automatic discharge.

[4] Conversely counsel for the Canada Revenue Agency (“CRA”) vigorously argued that in this case a significant payment by the bankrupt ought to be ordered as a condition of any discharge.

[5] 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

[6] Titania Baran (the “Bankrupt”), demonstrated initiative in determining to create an employment agency, operated from her home, for the purpose of supplying hourly-paid labourers to various factories and businesses in the vicinity of her home.

[7] She incorporated a company in 2009; it was called T&T Consulting Inc. When she initiated a company, she went online and determined the requirements for remittance of employee withholding taxes, for the collection and remission of GST and other requirements.

[8] She hired a bookkeeper who was responsible for assisting with the annual tax returns of company.

[9] Basically, the business found workers who were prepared to do manual labour for the current minimum wage and charged a mark-up for her services to the employers who requested that she find daily or weekly hourly-paid workers for them.

[10] She had one child when the business started, and a second was born, while the business was in operation. For these and other reasons, she was not able to meet some of the requests made to her by her customer base for labourers.

[11] She testified before me that she therefore determined to subcontract the work to other employment agencies, who would share the majority of the "mark-up" on the wages to be paid to the labourers, located by them.

[12] The sub-contracted agents were responsible for paying their workers, out of monies received in payment of the contracted agents’ invoices rendered to T&T Consulting, which was owned and operated by Mrs. Baran.

[13] Mrs. Baran would invoice the ultimate employer for wages and GST, receive payment, and then remit the bulk of the monies received to the contracted agents. In those cases, her gross profit would be the difference between those two amounts.

[14] When she located the employees directly, the full amount of any mark-up for work performed by the company's own employees would be retained by the company.

[15] Her evidence, which was the only evidence before me, was that a representative of CRA conducted an audit of her business. It was her evidence that the auditor apparently refused to recognize the expenses and indirect wages paid to the subcontractors as legitimate business expenses for the bankrupt’s company. She was given no explanation as to why.

[16] In effect, this meant that gross income received in an amount in excess of $2 million was treated as virtually all being income that was subject to tax. The cost of the wages of the subcontractors, employees and mark-ups paid to those subcontractors were all apparently removed from the equation.

[17] Similarly, the GST input tax credits with respect to the amounts of GST paid on the accounts of the subcontractors are rendered to her company apparently were not accepted by the auditor.

[18] The principle claimed for the year 2009 alone as unpaid by CRA is $799,425.22. When earlier years’ amounts and penalties were added the total claim received by this individual running the incorporated business from her home, claimed against her personally, was $854,518.28.

[19] The Trustee had no information to contradict this evidence. I invited and pressed counsel for CRA to provide any evidence to contradict this version of the facts as presented under oath by the bankrupt. She demurred.

[20] Her position was that as a matter of law I was required to accept that the tax debt owing as “proven” by the filing of its claim with the Trustee.

[21] Thus, this was a “tax-driven bankruptcy” and that it was obligatory for me to apply the consequences outlined in Section 172.1.

[22] I found this conclusion troubling based upon my assessment of the only available evidence before me.

III. Statutory Environment: Discharges

[23] In this section of my endorsement I examine and place emphasis on the Discharge process applicable in this case. Section 172 of the BIA is of general application and reads:

(1) On the hearing of an application of a bankrupt for a discharge, other than a bankrupt referred to in section 172.1, the court may

(a) grant or refuse an absolute order of discharge;

(b) suspend the operation of an absolute order of discharge for a specified time; or

(c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property.

(2) The court shall, on proof of any of the facts referred to in section 173, which proof may be given orally under oath, by affidavit or otherwise,

(a) refuse the discharge of a bankrupt;

(b) suspend the discharge for such period as the court thinks proper; or

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

[24] Parliament amended these provisions in 2005 to add Section 172.1. The portions of that section applicable to Mrs. Baran, as a first time bankrupt, with a substantial tax claim against her, read as follows:

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;

[25] Mrs. Baran has not been bankrupt previously. It is uncontested that the surplus income provisions under section 68 were not triggered in this case, meaning that a 9 month interval applied.

[26] The reason that a hearing was mandatory in this case is set out in Section 172.1(2):

(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.

[27] Subsection 3 delineates the alternatives available to me at this discharge hearing:

(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.

[28] The factors to be considered on such an application are enumerated as follows:

(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.

[29] While this subsection defines matters which must be taken into account, I do not interpret it as limiting the matters that I can consider in determining appropriate conditions.

[30] Lastly, if a discharge is suspended in the circumstances certain additional requirements are imposed by statute:

(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.

IV. Meaning of “personal income tax debt”

[31] One of the concerns I have in this case relates to the nature of the debt alleged to be owing by the individual bankrupt. There was no evidence before me whatsoever that Mrs. Baran received any of the alleged taxable income in her personal capacity. Here, she intended to operate her employment agency business through a corporate vehicle, from the outset. That corporation was the entity that paid the various labourers, and that submitted both the GST and employee withholding payments relating to them.

[32] It appears that CRA made the assessment against the individual and not her company. That amongst other reasons was why she says she why she appealed the assessment following the audit. Apparently no reassessment of her company was ever received following the audit process. Why this is the case is an unexplained mystery.

[33] This situation would seem to trigger subsection 8 which prevents the application of section 172.1 to this bankrupt if the liability is somehow related to her position as a director of T&T Consulting:

(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. [my emphasis throughout]

V. Notice of Objection under Income Tax Act

[34] Following receipt of the original audit results, and notice of assessment, understandably, the bankrupt filed a notice of objection on January 26, 2011. By letter dated February 18th, 2011 (filed as Exhibit 1 on the examination before me of Mrs. Baran) 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.

[35] That is what any taxpayer ought to be entitled to expect. However, the letter continued to advise that an appeals officer would be contacting Mrs. Baran 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 "of the documents relating to the issue(s) in dispute ”.

[36] However, the letter continued by indicating that based on the current inventory of cases, "It will take approximately six to nine months before we can contact you or your representative."

[37] Having considered the cost of obtaining assistance to deal with the CRA assessment and the delay involved, Mrs. Baran felt she had no alternative but to file for bankruptcy on July 13, 2011.

[38] She has yet to receive any response from CRA providing a justification for the amounts they claim. I asked the representative of the Trustee, what position they had taken with respect to the notice of assessment. The response I received was that there was no money available in the estate to support any challenge and the objection apparently lapsed or was withdrawn.

[39] I find this turn of events troubling, but perhaps it is understandable given the inability of the bankrupt to fund the process, particularly where over 99% of the total indebtedness was claimed to be owed to CRA.

VI. The Discharge Process

[40] As noted above, there was no surplus income in this case. As a consequence, the bankrupt would have been entitled to her discharge in April of 2012 but for the provisions of Section 172.1.

[41] By notice dated February 9, 2012, the trustee advised that it intended to oppose the discharge in part because the personal tax liability of the bankrupt exceeded $200,000 and represented 75% ( or more) of her proven debt.

[42] By notice dated April 11, 2012. The Attorney General of Canada on behalf of her Majesty the Queen in Right of Canada as represented by the Minister of National Revenue, gave notice under section 170 (7) of the BIA that they would oppose the discharge of the bankrupt on the following grounds:

“(a) the bankrupt has failed to account satisfactorily for loss of assets and for deficiency of assets to meet the bankrupt’s liabilities; and

(b) such further and other grounds as the Lawyer may advise or this Honourable Court may permit.”

[43] No supporting affidavit was provided. No evidence was led before me in support of the one ground that was described in the notice. No justification for advancing this specific ground was provided at the hearing before me.

[44] By virtue of Section 172.1 (8), a hearing was required. It took until 2013 for that hearing to come on before me. The bankrupt has been required to be kept in limbo until this hearing before me.

[45] Regrettably, in my view, the content of that hearing left me in a difficult position.

[46] The Crown asserted that they had grounds to oppose this discharge. The court expects that all participants will only object on bona fide grounds.

[47] On occasion, I have observed what appeared to me to be instances of creditors apparently seeking to require parties to remain in bankruptcy for longer periods by taking advantage of systemic delays flowing from the filing of an opposition. On many occasions I have observed them then withdrawing the opposition on the eve of or at the actual hearing of the discharge.

[48] This is not how the system is intended to run. There is at least some responsibility on an opposing creditor to justify its allegations raised in a notice of opposition.

VII. Separation of Powers

[49] Part of the problem in the case of CRA files appears to be a division of responsibilities between the bankruptcy-related collection division and the assessment division.

[50] My responsibility is to weigh the evidence, and in to come to a result that is just in all the circumstances. On occasion, I have encountered difficulties verifying income tax liability related facts I felt would be relevant in matters coming before me.

[51] Here, the bankrupt sets out a state of affairs, which could very readily be interpreted as leading to the conclusion that there was no real income tax debt owed by her in this case.

[52] The CRA auditor was not brought to court. Notwithstanding my urging counsel for CRA to provide me with any evidence that I could rely upon to support the factual underpinning of her client’s position in this case, no such evidence, apparently, was available at the hearing.

[53] Instead, it was argued that I was obliged to accept that the amount was owed by virtue of the operation of various statutory provisions and the previous case law. This led to the conclusion, argued on behalf of CRA that I ought to impose a condition requiring payment of at least 10% of the over $700,000 principal portion of the claim of CRA, as admitted by the trustee.

[54] I continue to believe that there is a duty on a creditor filing a notice of objection to have some basis for the objection and the time of filing and to support the objection when opposing at a discharge hearing. Nevertheless, that holding need not be made in this case, in order for me to come to what I regard as a just conclusion.

VIII. Caselaw and Statutory Provisions

[55] Counsel for CRA provided me with two specific decisions in support of their up as position regarding the lack of discretion available to me in this case.

[56] The first is Re Norris, 1989 4079 (ON CA), 69 O.R. (2d) 285; 60 D.L.R. (4th) 606; 1989 10170 (ON CA), 34 O.A.C. 304; 75 C.B.R. (N.S.) 97. This was a 1989 decision of the Ontario Court of Appeal delivered by Justice Zuber in a case where a claim for taxes owing was filed in the bankruptcy of Mr. Norris. The claim was disallowed by the trustee in bankruptcy. The Crown appealed unsuccessfully to the deputy registrar in bankruptcy and again without success to Anderson J. The Crown was successful on its appeal to the Court of Appeal.

[57] The brief reasons of that court consider the actions of the trustee:

4 The trustee was not satisfied with the notice of claim filed by the Crown and asked for more information. In response to this request the Crown supplied the trustee with the notice of assessment directed to the bankrupt Albert Norris. The trustee was still not satisfied and asked for "the working papers that Revenue Canada auditors had prepared to establish the amounts owing by 542175 Ontario Limited''. Neither the working papers nor any further detail was furnished to the trustee and the claim of the Crown was disallowed. The deputy registrar with whom Anderson J. agreed held that the proof of claim and the notice of assessment were not sufficient for the trustee to discharge his statutory duty and that total disallowance of the claim was appropriate. With great respect to that view, we disagree.

[58] Justice Zuber’s judgment applies a section which is contained in the same form in the present Income Tax Act, as well, and provides guidance for such cases:

5 In our view it was within the power of the trustee to call for evidence to support the proof of claim. However, the request of the trustee was fully answered by the notice of assessment. Section 152(8) of the Income Tax Act provides as follows:

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 therein or in any proceeding under this Act relating thereto. [my emphasis added]

6 A taxpayer who objects to an assessment may file a notice of objection pursuant to s. 165(1) of the Income Tax Act and if necessary proceed to exercise rights of appeal to the Tax Court and to the Federal Court. When the trustee in bankruptcy wishes to question the validity of an assessment against a bankrupt he, like anyone else, must seek his remedy within the Income Tax Act: see In Re Carnat Construction Co. Ltd. (1958), 37 C.B.R. 47, and Re Selkirk (No.2) (1972), 17 C.B.R. (N.S.) 302.

7 To hold that the trustee in bankruptcy can disallow an assessment made pursuant to the Income Tax Act would be tantamount to clothing the trustee with the powers of the Tax Court. No interpretation of the Bankruptcy Act, R.S.C. 1985, c. B-3, can support such a conclusion.

[59] In the result, the disallowance was set aside and the trustee in bankruptcy was directed to allow the claim filed by the Crown. Such allowance of the claim was, however, without prejudice to the right of the trustee in bankruptcy to proceed with any right he might have under the notice of objection to the assessment, which had been filed by the trustee.

[60] Here, that alternative does not appear to be available at this stage. The case clearly prevents a reconsideration of tax liability by the trustee. The Crown argues that I as Registrar am bound by the same limitations.

[61] In support of that position, counsel also referred me to Section 12 of the Tax Court of Canada Act. Subsection 12(1) provides that the Tax Court has exclusive original jurisdiction to hear and determine References and Appeals to the Court on matters arising under the Income Tax Act and a number of other statutes. I accept that with respect to the determination of liability under the Act and as providing for an organized approach to liability under the Income Tax Act.

[62] Nevertheless my role is to determine what weight is to be given to a “tax debt”, established prior to bankruptcy, when considering an appropriate discharge order in any specific case.

[63] If the Crown elects not to provide any support for the asserted liability, which liability, based on the evidence actually lead by the bankrupt, would appear to be at the very least suspect, the crown must, as well, accept the consequences.

[64] Proportionality would not dictate forcing the bankrupt through an expensive Tax Court appeal process to come to perhaps a situation where there was nothing to be paid. Such a result can more economically and more expeditiously be reached in the present forum.

[65] Mrs. Baran’s evidence was that at present she and her husband are only able to balance their monthly budget at present with financial assistance from their parents. Her sworn financial statement, filed as exhibit 2 before me, indicates she has virtually no ability to pay any amount towards the amounts sought by CRA.

IX. Analysis

[66] I find that no valid reasons to justify a refusal of a discharge in this case were established at the hearing before me.

[67] The common practice of this court, to exercise its discretion and to require a percentage of an established tax debt be paid as a condition of the discharge, is in my view clearly inappropriate in this case.

[68] Counsel for CRA heard the evidence (and lack thereof) in this case but still felt obliged to seek a conditional order requiring a significant 5 figure payment by the bankrupt. As noted above, CRA has a mandate at the time of an objection being filed to conduct a full and impartial review of the decision taken by CRA officers.

[69] In my view that obligation and duty to the taxpayer continues despite a bankruptcy and throughout the discharge process.

[70] I acknowledge in this case that I was disappointed to have no evidence to justify the tax debt. How the system generally should address cases like this is for another day. The tax may in fact be fully owed in this case, but I was not provided with any evidence as to an alternate view of the reality of the situation from CRA’s perspective.

[71] 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.”

[72] A rigid adherence to any one statutory provision may not give rise to a fair construction of the entire regulatory framework in a specific case which best ensures the attainment of the more specific objects of a statute of more specialized (and thus less general) application.

[73] Section 172.1 (4) is the portion of the legislative landscape which most clearly addresses the individual before this court. Under that subsection I am 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 claimed income tax debt was not demonstrated as ever having been genuinely incurred. There was no evidence of any “excess” funds or unexplained increased net worth. The bankrupt was an individual who started a business and still has no idea what she is alleged to have done to give rise to the allowed claim.

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

• The bankrupt had no surplus income as defined by the BIA. Having had her business destroyed by the reassessment she sought clarification but was left with no practical alternative to making a voluntary assignment in bankruptcy

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

• The bankrupt’s statement of affairs discloses no credit card debt whatsoever. It appears that other than claims resulting from her business being closed down due to the bankruptcy she had no unpaid creditors. She had run a successful business and paid her debts, but here was no evidence that the payment of those debts somehow reduced tax debts that were known to be claimed or owing.

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

• This point requires additional consideration. Mrs Baran has two children aged 3 and 8, and is expecting her third child this spring. Having lost her business due to the consequences of the CRA audit, she expects to stay home and look after the children, as day care costs in her present circumstances are prohibitive. Nevertheless, she appears to be a bright, creative individual and might well be in a position in the future to make a payment, were one 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 restrict the launching of any future initiative.

[74] The cogent, uncontested evidence before me was that Mrs. Baran created an enterprise that was helping numbers of workers find employment. She drove them to the factories so they would get to the right place, on time and generated employee tax deductions and GST revenue for the government. These are the kinds of activities that should be encouraged and celebrated.

[75] If she is not the innocent victim of circumstances, I have no way of knowing that at this point in time. If CRA had sought an adjournment to prove otherwise I would have been inclined to grant one on the basis of audi alteram partem. However, I continue to be of the view that an opposition ought not to be pro forma but rather based on “provable” facts, disclosed to the bankrupt prior to the hearing.

[76] No one refuted her evidence of the refusal of the CRA auditor to explain the disallowance of the deduction of the amounts paid through the subcontractors.

[77] Without such assistance what is a trier of fact to do?

[78] In every discharge case I am required to take a hard look at the personal circumstances of each bankrupt individual. I am obliged to consider the evidence put before me and to determine a just result in all the circumstances.

[79] This case was but one of thirty-nine matters on my Discharge Motion list for the day. In the hurly-burly of a series of individual stories on such days, the persons appearing before me range from innocent victims of circumstances to callous serial rogues. Many fall somewhere between those two extremes.

[80] My statutory discretion is broad, but must be exercised both in, not only a judicial, but also in a caring and compassionate manner, seeking to rehabilitate the unfortunate victims and to punish the rogues appropriately. Such punishment in the absence of evidence of misconduct is not within my understanding of the responsibilities I undertook when assuming the duties of Registrar.

X. Disposition

[81] But for the statutory provision, I would have been inclined to grant an Absolute Discharge at the hearing. The amount in issue is significant and CRA have clearly treated the issues raised in this case as important to them. As a consequence, this order shall take effect in seven days (i.e. as of Friday January 18, 2013).

[82] Having considered the case law and formed my opinion as set out above, in accordance with section 172.1 (4) (b) of the BIA, I am suspending discharge of the bankrupt Titania Baran, for a period of one day. Her discharge shall therefore be effective on Saturday, January 19, 2013. In my view it would, in the circumstances of this case, be inappropriate for the court to impose any other condition on her discharge, whatsoever.

Master D. E. Short
Registrar in Bankruptcy

January 11, 2013

DS/ B10