SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE bankruptcy of Tatiana Baran

BEFORE: D. M. Brown J.

COUNSEL: M. Vujnovic, for the Appellant, Attorney General of Canada

K. Page, for the Respondent, bankrupt, Tatiana Baran

HEARD: November 29, 2013

REASONS FOR DECISION

I. Appeal from a Registrar’s bankruptcy discharge order in a tax-driven bankruptcy

[1] By reasons released January 11, 2013, Registrar Short, pursuant to section 172.1(3)(b) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, suspended the discharge of the bankrupt, Tatiana Baran, for one day.[^1] The Registrar declined to impose any condition on her discharge.

[2] Her largest creditor was the Canada Revenue Agency. Her Majesty the Queen in Right of Canada, as represented by the Minister of National Revenue (hereafter the “CRA”), appealed the discharge order.

[3] For the reasons set out below, I grant the appeal and impose the payment of $8,000.00 as a condition of discharge.

II. The bankruptcy

[4] On July 13, 2011, Ms. Baran filed an assignment in bankruptcy. She had operated a short-term labour employment agency through a corporation. The Canada Revenue Agency conducted an audit of her business. The CRA issued a notice of assessment. Ms. Baran filed an assignment in bankruptcy. According to the July 8, 2011 Statement of Affairs signed by the bankrupt, her unsecured debt due to the CRA totaled approximately $3.420 million. Her Monthly Income and Expense Statement of the same date disclosed total monthly family unit income of $2,876.98, being the income earned by her husband of about $50,000 gross per year. Monthly expenses totaled $4,755.00. Ms. Baran and her husband have three young children.

[5] On August 24, 2011, the CRA had filed a proof of claim with the Trustee for an unsecured debt of $854,518.28 based on a “claim for unpaid Income tax”. The statement of account attached to the proof of claim recorded the sum of $799,425.22 as the principal amount of the debt, with the balance consisting of penalty and interest.

[6] The Trustee’s February 9, 2012 report pursuant to BIA s. 170(1) reported proven unsecured liabilities of $855,698.99. The Trustee answered “yes” to Question 5 on Form 82: “Did the bankrupt have high income tax debts pursuant to section 172.1 of the Act?” The Trustee reported that the bankrupt had failed to provide information for the filing of her 2010 income taxes and the trustee opposed her discharge. In answer to Question 12, the Trustee reported:

The bankrupt’s personal income tax liability exceeds $200,000 and represents more than 75% of her proven debt.

Canada Revenue Agency filed an unsecured claim in the amount of $854,518.28, representing income tax arrears for the years 2007, 2008 and 2009.

[7] Her Majesty the Queen in Right of Canada, as represented by the Minister of National Revenue, filed a Notice of Opposition to Discharge on the ground that the bankrupt had failed to account satisfactorily for loss of assets and for deficiency of assets to meet the bankrupt’s liabilities. The Registrar concluded that the CRA had not proved that ground of opposition; no appeal was taken from that finding.

[8] Only the bankrupt testified at the discharge hearing. At the hearing the bankrupt testified that she had received a notice of reassessment from CRA. Ex. 1 marked during her testimony was a February 18, 2011 letter to her from the Appeals Division of the CRA responding to objections she had filed to the assessments made for the 2007, 2008 and 2009 tax years and advising that it might take up to nine months for a representative of the CRA to contact Ms. Baran to discuss her objection. Ms. Baran testified that she could not afford to proceed with the appeal because she lacked money to pay a lawyer, “so I had no choice and I had to go and apply for bankruptcy”.[^2] Her appeal did not proceed; Ms. Baran was unclear whether or not she formally had withdrawn her appeal.

III. Grounds of Appeal

[9] The CRA advanced two, related grounds of appeal:

(i) The Registrar had exceeded his jurisdiction by making a determination of the accuracy of the Crown’s income tax assessments of the bankrupt and he relied on that determination in his conclusion regarding the appropriate terms of the bankrupt’s discharge;

(ii) The Registrar had exceeded his jurisdiction by making a determination on the validity of the Crown’s proven claim in the bankruptcy, which was not disallowed by the Trustee, and he relied on that determination in his conclusion regarding the appropriate terms of the bankrupt’s discharge.

[10] The bankrupt submitted that the Registrar’s Reasons, when read as a whole, did not disclose any such error and this appellate Court should not interfere with the Registrar’s exercise of his discretion in regard to the terms of discharge.

IV. Standard of review

[11] In Hejna (Re), C. Campbell J. re-iterated the standard of review applicable on an appeal from an order of the Registrar in bankruptcy:

Numerous cases have dealt with the standard of review on appeal from the Registrar. The test is succinctly stated in Impact Tool & Mould (Trustee of) v. Impact Tool & Mould (Interim Receiver of), 2006 7498 (ON CA), 20 C.B.R. (5th) 220 C.A.:

An appeal of the registrar's order will be allowed where it is demonstrated that the registrar erred in principle or in law or failed to take into account a proper factor or took into account an improper factor, which led to a wrong conclusion. [See also "Bankruptcy & Insolvency" Law of Canada, 4th ed., Revised Vol. 3, Carswell (looseleaf) at P 7-102.][^3]

V. Analysis

[12] According to the Trustee’s BIA s. 170 Report, this was a tax-driven bankruptcy to which BIA s. 172.1 applied, and the Registrar proceeded on that basis.

[13] The Court of Appeal, in Re Norris,[^4] stated that while it was open to a trustee to call for evidence to support a proof of claim filed by the CRA, the delivery of a notice of assessment would fully answer that request. A trustee cannot disallow an assessment made pursuant to the Income Tax Act. A taxpayer who objects to an assessment may file a notice of objection and exercise appeal rights under the ITA to the Tax Court, and a trustee, like anyone else, must seek its remedy within the ITA.[^5]

[14] Did the Registrar ignore that principle? BIA s. 172.1(1) applies if a bankrupt has $200,000 or more of personal income tax debt and that personal income tax debt represents 75% or more of the bankrupt’s total unsecured proven claims. What findings did the Registrar make on those two points? After setting out the statutory framework created by BIA s. 172.1, the Registrar then made a series of comments about the bankrupt’s tax debt:

[50] My responsibility is to weigh the evidence, and is 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. (emphasis added)

The Registrar then reviewed the Court of Appeal decision in Re Norris and continued:

[59] In the result [in Re Norris], 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. (emphasis added)

[15] These portions of the Registrar’s Reasons disclosed that he strongly doubted that any “real income tax debt” of the bankrupt existed and he strongly suggested, in paragraph 63 of his Reasons, that the burden fell on the CRA to prove the amount of the tax debt at the discharge hearing notwithstanding that the Trustee had accepted, as a proven unsecured claim, the amount claimed by CRA pursuant to notices of assessment in respect of which the bankrupt taxpayer had not proceeded with an appeal. With respect, by taking such an approach the Registrar ignored the clear principles laid down by the Court of Appeal in Re Norris and, by so doing, erred in law.

[16] Did that error make any practical difference to the rest of the Registrar’s analysis? I conclude that it did. As can be seen from the following portions of the Registrar’s Reasons, he proceeded to conduct his discharge analysis under BIA ss. 172.1(3) and (4) as if no real tax debt was owed by the bankrupt because CRA had failed to prove the tax debt at the discharge hearing:

[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.

[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

[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?

While BIA s. 172.1(4)(a) directs a court to take into account “the circumstances of the bankrupt at the time the personal income tax debt was incurred”, such an analysis cannot turn into an inquiry into the validity of an assessed tax debt, the proof of claim for which has been allowed by the trustee. Unfortunately, the Registrar’s analysis turned into such an inquiry, which was impermissible and constituted an error of law.

[17] While the Registrar’s ultimate disposition at the discharge hearing came within the range of powers granted to him under BIA s. 172.1(3), his one-day suspension of the discharge represented a disposition at odds with the overwhelming weight of the jurisprudence dealing with tax-driven bankruptcies and was the technical device used by the Registrar to accomplish his remedial objective. As he wrote in paragraph 81 of his Reasons: “But for the statutory provision, I would have been inclined to grant an Absolute Discharge at the hearing.” The Registrar’s granting of a one-day suspension only resulted, I conclude, from his erroneous operating premise that since the CRA had failed to prove its debt at the discharge hearing, he could for all intents and purposes ignore the Trustee’s allowance of the assessed tax debt and, instead, proceed on the basis that no personal income tax really was owing. Such an erroneous operating premise constituted both a palpable and overriding error of fact and the taking into consideration of an improper factor.

[18] The general approach on discharge applications taken by courts in tax-driven bankruptcies can be gleaned from two sources. In Re Johnson Saunders J. stated:

The remarkable feature of this particular application is the failure by the bankrupt to pay any significant amount towards income tax for the years 1983 and 1984 notwithstanding the substantial income earned in those years. While it is proper to arrange one's affairs to attract the minimum amount of tax, once tax has been assessed it is the duty of all Canadian taxpayers to pay the tax imposed. While family responsibilities are, of course, important, there is, apart from emergency medical expenses, no debt more important than the payment of taxes by persons enjoying a good income. If a taxpayer does not pay his fair share, the burden arising from that failure falls on the other members of the community. Most Canadians have their tax collected at source or pay what is owing when they file their return.[^6]

Also, in the more recent case of Re Rivers, Master Baker quoted from Bennett on Bankrupty:

Most of the cases provide that a tax avoider should not be able to use the bankruptcy system as a means to escape payment. A bankrupt who does not pay taxes is not an honest and unfortunate debtor. Where the sole or principal creditor is the Canada Revenue Agency, the court has made orders requiring payment somewhere between 40 and 65 per cent of the claims as a deterrent.[^7]

[19] The survey of the case law filed by the appellant disclosed that in the last four years courts most usually impose, as a condition of discharge, payments in the range of 5% to 15% of the tax debt, with only two cases resulting in payments of 50% or more of the tax debt.

[20] Taking into account the factors set out in BIA s. 172.1(4), the evidence disclosed no reason why the general requirement of a payment of some portion of the tax debt as a condition of the discharge should not have been followed in this case. The tax debt principal of just under $800,000 called for some amount of payment as a condition of discharge.

[21] In Re Martino Lane J. stated that a condition of discharge imposed by the court should be sufficiently burdensome to make the point that the bankrupt’s conduct cannot be tolerated, but should not be unduly hard to the bankrupt to bear once she decides to return to employment.[^8]

[22] The appellant sought the imposition of a payment in the range of 5% to 10% of the tax debt. In the circumstances of this case I conclude that such an amount would be unduly burdensome and inconsistent with the rehabilitative goals of the bankruptcy regime. Ms. Baran recently had her third child, whom she brought to court. Her other children are under 10 years of age. At present she cares for them at home. Her husband grosses about $50,000 a year. While Ms. Baran is young – 34 years old – and no doubt will work in the future, her present circumstances would only justify the imposition of a payment below the 4% low end of the general range found in the case law.

[23] I conclude that requiring a payment of $8,000 (or 1% of the tax debt principal) as a condition of discharge would satisfy the policy objectives of BIA s. 172.1. I have no doubt that the bankrupt will perceive this amount as burdensome, but the amount probably will not be unduly hard once she decides to return to employment.

VI. Conclusion

[24] For the reasons set out above, I allow the appeal, set aside the order of Registrar Short made January 11, 2013, and order that Tatiana Baran shall be discharged from bankruptcy on the condition that she pay to the Trustee the sum of $8,000, on such terms as may be agreed to by the Trustee. The appellant did not seek its costs of this appeal.

D. M. Brown J.

Date: December 5, 2013

[^1]: 2103 ONSC 240

[^2]: Motion Record, Tab 7, p. 85, lines 26 to 29.

[^3]: 2010 ONSC 6734, para. 8.

[^4]: (1989), 1989 4079 (ON CA), 69 O.R. (2d) 285 (C.A.)

[^5]: Ibid., paras. 5 to 7.

[^6]: (1987), 62 C.B.R. (N.S.) 108 (Ont. S.C.), para. 11.

[^7]: 2013 BCSC 324, para. 26.

[^8]: Re Martino (2004), 2004 17978 (ON SC), 50 C.B.R. (4th) 132 (Ont. S.C.J.), para. 40.