Court File and Parties

Court File No.: 31-1428495 31-1552001 32-1197412 Motion Heard: 2018-07-24

Superior Court of Justice – Ontario (In Bankruptcy and Insolvency)

Re: Theodora Angela Glasgow, Bankrupt Bhagwandeen Mahabir, Bankrupt Michael Joseph Doucette, Bankrupt

Before: Master J. E. Mills

Counsel: P. Bertoia, Office of the Superintendent of Bankruptcy K. Page, Counsel for the Trustee Kevin Thatcher & Associates Ltd.

Heard: July 24, 2018

Reasons for Decision

[1] These three estates were submitted for taxation as a result of negative comment letters from the Office of the Superintendent for Bankruptcy (“OSB”) in respect of the same issue for each estate.

[2] The trustee obtained from each of the bankrupts a written agreement purporting to be an assignment of the bankrupt’s goods and services tax (“GST”) refund which authorized the trustee to use the GST refund held on account for the benefit of the bankrupt towards the outstanding balance owing in respect of the administration of the estate and any conditional orders which may be imposed by the court. In each case, the trustee obtained the written GST Refund Assignment more than three years after the voluntary assignment by the bankrupt, in the face of known and existing liabilities.

[3] Although titled “GST Refund Assignment”, the document is in fact a direction to pay. The agreement does not assign all rights and interests in the GST refund to the trustee but rather directs how the funds are to be used. Regardless, whether an assignment or direction to pay, the agreement is unenforceable as against the bankrupt.

[4] Paragraph 67(1)(b.1) of the Bankruptcy and Insolvency Act (“BIA”) states that the property of the bankrupt divisible among the creditors shall not comprise goods and services tax credit payments made in prescribed circumstances.

[5] Rule 59 of the BIA Rules establishes the prescribed circumstances for operation of s. 67(1)(b.1), providing that a goods and services tax credit payment is not comprised in the property of the bankrupt if a dividend is available to creditors without taking that payment or part of that payment into account. For greater certainty, Rule 59(3) expressly provides that if no dividend would be available to the creditors even if the goods and services tax credit payment were taken into account, all of that payment is comprised in the property of the bankrupt for the purpose of paragraph 67(1)(b.1).

[6] Each of the estates presented for taxation resulted in the declaration of a dividend for creditors and a levy paid to the OSB pursuant to the provisions of the BIA.

[7] The OSB submits the trustee had neither the authority to retain the GST payments in the estates nor to have the GST payments assigned to it. It is on this basis the negative comment letters were issued.

[8] The trustee relies on the decision of the Alberta Provincial Court in Re McIntyre, [2018] A.J. No 615, 2018 ABQB 380 where this issue was considered as a result of the practice of Edmonton Registrars to order that a GST refund may be assigned to meet a bankrupt’s financial obligations. It was recognized that such orders are permissive in nature such that the assignment of this otherwise exempt property remains with the bankrupt. The trustee of the McIntyre estate was seeking to create a commercially prudent and practical approach to handling GST refunds which did not require the trustee to provide a cheque to the bankrupt for the amount of the GST refund only to then have the bankrupt cash the cheque and remit funds back to the trustee.

[9] The court in Re McIntyre stated that “a properly worded assignment that transfers the rights and interests in the GST refund would comply with Section 67(1)(b.1) and Rule 59 of the BIA without the need for multiple deposits and withdrawals” however, “the assignment must be worded properly and careful thought must be given to whether the bankrupt understands the process he/she is being asked to participate in.” [3] It was acknowledged by the Court that in some circumstances, the appropriate timing for any such assignment may be later in the bankruptcy when the bankrupt is in a better position to make an informed decision as to whether the funds ought to be applied to reduce a financial obligation to the estate or whether the bankrupt’s immediate need for the funds is greater than the incentive for an early discharge. [4]

[10] On this basis, the trustee submits the bankrupt can waive the exempt status of a GST refund by way of a properly worded assignment provided the bankrupt has been fully informed of his or her rights and obligations under the BIA. It is submitted that provided each individual case is assessed by the trustee as to whether the bankrupt fully understands and appreciates the implications of an assignment, an assignment of the funds may be effected. The trustee submits each of these bankrupts was informed and understood the implications of directing the trustee to retain the GST refunds.

[11] With respect, I disagree with the decision in Re McIntyre and I decline to follow the decision or to adopt the reasons expressed therein. I do sympathize with the trustee and the court in attempting to fashion an administratively convenient means by which the trustee may apply GST refunds held in an estate to any outstanding financial obligation of the bankrupt. However, Parliament has specifically turned its mind to this issue and has expressly prohibited the retention of a GST refund in circumstances where there are sufficient funds in the estate to result in a distribution to creditors. There is no legislative vacuum respecting this issue.

[12] Section 67 of the Financial Administration Act expressly provides that except as specifically provided by an Act of Parliament, a Crown debt is not assignable and no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person any rights or remedies in respect of that debt.

[13] It is acknowledged that a GST refund is a Crown debt and that there is no Act of Parliament permitting its assignment. Indeed, s. 67(1)(b.1) and Rule 59 of the BIA expressly prohibit the retention of GST refund payments in these prescribed circumstances.

[14] As stated by the Supreme Court of Canada in Marzetti v. Marzetti, [1994] 2 SCR 765, Parliament has established a regime which determines whether there exists “property of the bankrupt divisible among his creditors” and, in the face of that regime, the trustee and the bankrupt cannot use contract law to circumvent statutory law. “In the absence of a clear statutory authority to permit the assignment, s. 67(a) of the Financial Administration Act takes hold and renders that Crown debt is not assignable.” [7] The agreement executed by the bankrupt was statutorily incapable of creating an effective assignment. [8]

[15] The GST Refund Assignment agreement executed by each of the bankrupts in these estates was also statutorily incapable of creating an effective assignment and is therefore unenforceable. The statutory law cannot be circumvented by contractual agreement, whether drafted as an assignment or a direction to pay. The GST refunds held by the Trustee must be returned to the bankrupts.

[16] The Statement of Receipts and Disbursements issued for each estate must be restated to reflect the GST refund payment being returned to the bankrupt, submitted to the OSB for comment, and then resubmitted to the Court for taxation.

Master J. E. Mills

Date: July 30, 2018

Footnotes:

[1] R.S.C. 1985, c. B-3, as am. [2] [2018] A.J. No 615, 2018 ABQB 380 at paras. 11 and 12. [3] Ibid. at para. 13. [4] Ibid. at para. 15. [5] R.S.C. 1985, c. F-1. [6] [1994] 2 SCR 765, at p. 25 [7] Ibid. [8] Ibid., at p. 26