Court File and Parties
COURT FILE NO.: 33-2263698 DATE: 2020/03/23 ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF CHRISTOPHER SEAN REID OF THE CITY OF OTTAWA IN THE PROVINCE OF ONTARIO
BEFORE: Master Fortier
HEARD IN OTTAWA: October 28, 2019
APPEARANCE: Andree Laurencelle, Baker Tilly Ottawa Ltd., Trustee in Bankruptcy for the Estate of Christopher Sean Reid Ilya Medovikov, for the Canada Revenue Agency Christopher Sean Reid, Self Represented Bankrupt
Reasons for Decision
[1] Christopher Sean Reid (“the bankrupt” or “Mr. Reid”) is a 47-year-old first time bankrupt. He is married and has two children, ages 12 and 13. He made an assignment into bankruptcy on June 15, 2017 and gives business failure as the reason for his bankruptcy.
[2] The only proven unsecured claim in this bankruptcy is a debt to the Canada Revenue Agency (“CRA”) in the sum of $252,206.90, comprised of $171,166.32 in personal income tax owing for taxation years 2011 to 2016, and a further $81,040.58 in unremitted GST/HST for the reporting periods in 2011 and 2012.
[3] CRA opposes Mr. Reid’s discharge on the following grounds:
a) The assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities for which the bankrupt can justly be held responsible;
b) The bankrupt has omitted to keep such books of account as are usual and proper in the business carried on by the bankrupt; and
c) The bankrupt has failed to perform the duties imposed on the bankrupt under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“the BIA”) as amended.
[4] At the time of his assignment into bankruptcy, the bankrupt was a self-employed consultant working for an e-commerce business owned by his father and stepmother.
[5] Mr. Reid did not file income tax returns for the 2011 and 2012 taxation years and was assessed under subsection 152(7) of the Income Tax Act (R.S.C., 1985, c.1 (5th Supp.)) on September 15, 2014. CRA determined that Mr. Reid owed the sum of $84,495.47 in unremitted taxes, penalties and interest for those years.
[6] The Trustee’s Preliminary Report of July 7, 2017 indicated that the bankrupt had the following two failed businesses:
a) 6304621 Canada Inc. The bankrupt was the sole shareholder of this Corporation which he stated was inactive since January 2014. It was determined that the Corporation owed approximately $33,000.00 to CRA on account of outstanding corporate taxes, HST and source deductions. The Corporation had no assets and the Trustee concluded that the corporation was insolvent; and
b) BCTGL Corporation. The bankrupt owned 50% of the shares and he declared it to be inoperative. It was determined that the bankrupt was owed the sum of $60,000.00 in wages. As the company appeared to be insolvent, the Trustee did not anticipate realizing on the shares.
[7] In the Preliminary Report of July 7, 2017, the Trustee also reported difficulty in ascertaining Mr. Reid’s income for the purpose of determining surplus income. In particular, Mr. Reid disclosed that he was employed as a consultant in an e-commerce partnership founded by his father and step-mother and reported that he had not received any income as the business was still in its infancy. According to the bankrupt, he was being supported by his wife, who is employed at Carleton University.
[8] Following a request for an accounting to confirm the bankrupt’s income, the Trustee received an email from Mr. Reid’s father that indicated that he intended to pay Mr. Reid the sum of $3,000.00 a month once the business had a positive cash flow. Given these circumstances, the Trustee was unable to determine if there would be any surplus income payable to the estate at that time.
[9] As the Trustee continued to experience challenges in verifying the bankrupt’s income, she opposed his discharge in February 2018 on the following basis:
Grounds 173(1)(a)(o); The Bankrupt shall provide the Trustee with the proof of income for the period covered by the bankruptcy; the monthly budget sheets for the period covered by the bankruptcy as well as the income tax information in order for the Trustee to prepare the outstanding tax returns for the taxation years 2013 to 2017.
[10] The preparation of Mr. Reid’s outstanding tax returns for taxation years 2013 to 2017 was hindered because he claimed that his books and records in respect to those taxation years were destroyed by a flood in his basement. Although the Trustee verified that a flood had indeed occurred, it was unclear whether all the documents were lost in the flood. In any event, Mr. Reid estimated his income for these years and filed the returns in February 2018.
[11] It was determined that Mr. Reid owed additional pre-bankruptcy personal income tax for the taxation years 2013 to 2016 in the sum of $86,670.85 including unremitted taxes, penalties and interest.
[12] In addition to not filing his personal income tax returns, Mr. Reid also neglected to file his GST/HST returns for 2011 and 2012 and consequently owed the sum of $81,040.58 in GST/HST debts, including penalties and interest.
[13] In July 2018, the Trustee requested Mr. Reid’s monthly budgets from June 2017 to July 2018, as well as a copy of his bank statements for that period.
[14] Mr. Reid provided his monthly budgets with all Income and Expense Statements showing identical figures, all dated July 20, 2018. For each month, Mr. Reid disclosed $2,100.00 in employment income, $2,060.00 in “other expenses”, $20.00 for alcohol and $20.00 for dining/lunches/restaurants. For each month, Mr. Reid indicated that his spouse refused to disclose her income.
[15] Mr. Reid did not provide copies of his bank statements, indicating that he does not have a bank account. Rather, his pay was being deposited into his wife’s bank account and she would not consent to the release of her bank statements.
[16] The CRA obtained a copy of Mrs. Reid’s her bank statements from January 1, 2016 to September 30, 2018 through a Requirement for Information to her financial institution. According to the bank statements, a total of $67,315.00 was transferred to Mrs. Reid’s account for this period from either Mr. Reid’s father or his father’s business, which employed Mr. Reid.
[17] By way of explanation for the difference in income reported in his income and expense statement and the amount deposited into his wife’s bank account, Mr. Reid provided a copy of a bank statement, with handwritten notes on the margin, purportedly written by his father stating: “2018 sent $67,315.00 to Mylien of that $25,200.00 was for Chris’ fees re verbal contract. We gifted 42, 115 after personal tax money to help with kiddies’ activities and other stuff. My best recollection”.
[18] At the request of the CRA, the Trustee calculated the surplus income payable using the full amount of $67,315.00 as income for 2018. According to the Trustee’s calculation, the surplus income payment would be $1,238.38 over a 21-month bankruptcy for a total of $26,005.88.
Position of the Parties
The Trustee
[19] According to the Trustee, there has been significant difficulty throughout this bankruptcy in ascertaining the bankrupt’s income for the purposes of determining surplus.
[20] The main issue, according to the Trustee, is whether the sum of $67,315.00 can be imputed as income for the purposes of the surplus calculation. If that sum is not imputed, there would be no surplus income based on the income information in the income tax returns filed by the bankrupt. If that amount is imputed as income, Mr. Reid would owe the sum of $26,005.88 in surplus income.
[21] The trustee does not recommend a further period of suspension as Mr. Reid is a first time bankrupt, having been in bankruptcy since June 2017.
The Bankrupt
[22] Mr. Reid is asking for an unconditional discharge from bankruptcy for the following reasons:
- This is his first bankruptcy and he has taken steps to ensure that this will not happen again;
- He has filed his taxes diligently since his bankruptcy;
- As part of his rehabilitation, he no longer handles his finances; and
- He does not have the ability to pay $26,005.88 in surplus income.
[23] Mr. Reid is currently working on a part-time basis as a consultant in his father and step-mother’s e-commerce business in addition to home schooling his two children. It is his intention to continue to home school his children for the next 6 to 9 years and then volunteer his time with underprivileged children in the area of martial arts.
[24] Mr. Reid has had two failed businesses. It was his evidence that he does not handle finances well and, in the past, he focused on opportunities to quickly earn money. His inability to properly handle finances led to the tax debt that eventually “caught up” to him. After being warned several times by CRA that he must deal with the taxes owing for 2011 and 2012, he made one payment towards his tax debt, following which his bank account was garnished.
[25] According to Mr. Reid, he suffered from depression and denial until he finally decided to make an assignment into bankruptcy.
[26] His wife, Mylien Reid, works for Carleton University and currently handles all the finances in the household. Mrs. Reid refuses to disclose her income and did not provide evidence at the hearing. It is the bankrupt’s evidence that:
- He does not have a bank account or any credit cards. He does not carry money, beyond the price of an occasional coffee or money for parking;
- He has not had a bank account since 2015 when the money in his account was garnished by CRA;
- All the money in the household is handled by his wife;
- He does not know how much his wife earns;
- The income that he earns from consulting is deposited by his father into his wife’s bank account, out of which his wife pays the expenses;
- Although there is a mortgage on the family home, the home is in his wife’s name. He does not know how much is owing on the mortgage and he is not aware of the monthly payments; and
- He has no knowledge of any of the expenses related to the running of the household and the family and he did not ask his wife in preparation for the hearing. According to Mr. Reid, there is a precedent in his family not to ask where money goes.
[27] Mr. Reid testified that he came up with identical figures in all his income and expense statements outlined in paragraph 14 above, because of the need to “write something”. He did not ask his wife about the cost of any of the expenses when preparing the statements nor how his income was used.
[28] With respect to the flood in November 2017, Mr. Reid testified that everything in the basement of the home was thrown away, along with all financial records.
[29] When asked whether he made enquiries about the $60,000.00 owed to him from BCTGL, Mr. Reid stated that he never discussed it with his partner, nor followed up in any way. The financial statements of the corporation were allegedly lost in the flood of November 2017.
[30] Mr. Reid indicated that he has reformed his behavior towards his finances since his assignment into bankruptcy and accepts responsibility for his actions. He blames the fact that he was struggling with depression prior to his assignment into bankruptcy and convinced himself that he could pay CRA, despite having no ability to pay.
The CRA
[31] The CRA is seeking an Order that Mr. Reid’s discharge from bankruptcy be conditional on:
a) Payment of the sum of $26,005.88 in surplus income;
b) The filing and payment of income taxes while undischarged and that he provide proof to the Trustee; and
c) A further 6-month suspension.
[32] The CRA’s evidence was provided by way of two affidavits of Sui Xin Zhu, a Collections Officer with the Collection and Verification Branch of the International and Ottawa Tax Services Office of CRA. The affidavits are dated September 27, 2019 and October 4, 2019 respectively.
[33] Sui Xin Zhu’s affidavit of September 27, 2019 outlines the reasons for CRA’s concern regarding the bankrupt’s discharge from bankruptcy. They are as follows:
a) The bankrupt has a history of not filing or late-filing his personal income tax returns;
b) Mr. Reid was a director and had complete control over 6304621 Canada Inc., and received a dividend payment of $30,000.00 in 2010, while the corporation owed tax debts of $32,802.77 for its tax years 2008 to 2011. These tax debts were written off since the corporation had no assets and was involuntarily dissolved on December 9, 2011;
c) The Bankrupt owes $252,206.90 in unpaid and unremitted taxes;
d) The CRA is the sole creditor in this bankruptcy; and
e) Despite having declared $2,100.00 per month in income, the Bankrupt appears to have the ability to contribute towards his sole creditor in this bankruptcy. [1]
The Law and Analysis
[34] One of the primary objectives of the BIA is to enable an honest but unfortunate debtor to obtain a discharge from his or her debts, subject to such reasonable conditions, if any, as the court may see fit to impose, so that the debtor can make a fresh start. [2] However, if bankruptcy is a convenient means to evade payment of just obligations and obtain discharge without difficulty, bankruptcy becomes an abuse. [3]
[35] The courts have held that the discharge from bankruptcy is not a matter of right and in exercising its discretion, the court must balance three things when granting a discharge:
a) The interests of the creditors in being paid;
b) The interest of the rehabilitation of the bankrupt; and
c) The integrity of the bankruptcy process and the public's perception of it. [4]
[36] Although Mr. Reid’s personal income tax debt does not meet the $200,000.00 threshold required for a tax driven bankruptcy pursuant to s. 172.1(1) of the BIA, the legal principles for such bankruptcies provide some guidance.
[37] The following principles related to tax debts can be gleaned from the cases:
a) A tax avoider should not be able to use the bankruptcy system as a means to escape payment; [5]
b) A bankrupt who does not pay taxes is not an honest and unfortunate debtor; [6]
c) The court should not permit a self-earner to run up an income tax liability and then go bankrupt; [7]
d) In considering what conditions to impose where the bankrupt has a significant tax debt, the court reviews:
- whether the bankruptcy came about as a result of an accident or whether there was a persistent ignoring of the tax obligation; [8]
- the bankrupt’s ability to contribute towards a conditional order; [9]
- whether the bankrupt has since the bankruptcy continued to ignore the obligation to pay income tax.
[38] Prior to balancing the various interests in ascertaining what conditions of discharge, if any, ought to be imposed, in my view, I must first determine whether the sum of $67,315.00 ought to be considered as part of Mr. Reid’s total income for the purposes of calculating surplus income.
[39] “Surplus income” is defined in section 68(2) of the BIA as the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living. Section 68(2) defines the “total income” of the bankrupt as “the revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge.”
[40] In Saran (Re), 2018 ONSC 6045, [10] Kershman J. held that the court can impute income to the bankrupt when individuals work for relatives, or if their income is controlled by the relatives.
[41] In my view, the sum of $67,315.00 ought to be imputed to the bankrupt and included in his total income for the following reasons:
a) The bankrupt works for his father and both his father and the bankrupt’s wife control his income;
b) There is no corroborating evidence to support Mr. Reid’s claim that he only earns the sum of $2,100.00 per month;
c) The evidence that Mr. Reid’s father deposited the sum $67,315.00 into Mrs. Reid’s bank account is uncontradicted;
d) The handwritten note allegedly written by Mr. Reid’s father purporting to allocate the sum of $42,115 out of the $67,315.00 deposited into Mrs. Reid’s bank account to “help with kiddies’ activities and other stuff” is nothing more than hearsay and self-serving. It is noteworthy that Mr. Reid’s father did not testify at the hearing nor provide affidavit evidence;
e) There is no evidence to support the allegation that the monies deposited into Mrs. Reid’s account were used by Mrs. Reid for activities for the children. Again, it is noteworthy that Mrs. Reid did not provide any evidence at the hearing.
[42] I accept the Trustee’s calculation that the surplus income payable would total $26,005.88 over a 21-month bankruptcy using the sum of $67,315.00 as the bankrupt’s income.
[43] I turn now to balancing the various interests in ascertaining what conditions of discharge, if any, ought to be imposed.
[44] Every application for discharge must be determined on its own particular facts and by the due exercise of judicial discretion. [11]
[45] The court must balance the rehabilitative objectives of the Act with the interests of the creditors and the public as a whole. In balancing these interests, the court has wide discretion in making a conditional order requiring the bankrupt to pay certain amounts.
[46] Based on the evidence before me, in my opinion, Mr. Reid does not fall into the category of an honest but unfortunate debtor. Rather, in my view, Mr. Reid can be described as a tax avoider who has used his bankruptcy to escape payment.
[47] Mr. Reid’s testimony about his complete lack of knowledge regarding the family’s income and expenses lacks credibility as does his assertion that all his personal and corporate financial documents were destroyed in a flood. I also question the motivation behind having his income deposited into his wife’s bank account.
[48] In my view, the evidence shows a pattern of non-compliance by Mr. Reid with respect to filing his income tax returns before and during his bankruptcy.
[49] Mr. Reid blamed his non-compliance prior to the bankruptcy on his mental health, stating that he was going through a depression. However, there was no medical evidence presented to the court speaking to the gravity and severity of Mr. Reid’s mental health or whether there is any causal relationship between the non filing of taxes and his mental health condition.
[50] The bankrupt’s testimony that he has filed his taxes diligently since his bankruptcy is not accurate. It was only after the Trustee opposed his discharge in February 2018 that his 2013 to 2017 income tax returns were prepared, albeit with difficulty because his financial records were allegedly destroyed in a flood.
[51] Mr. Reid is asking the court for an unconditional discharge. Although he testified that he is unable to pay the sum of $26,005.88, he did not provide any evidence to support that assertion. Rather, Mr. Reid has been working part time and home schooling his children since his bankruptcy, something that may not be reasonable under the circumstances.
[52] In my opinion, the cumulative effect of the evidence points to deliberate steps taken by the bankrupt before and throughout his bankruptcy to avoid paying his debt as well as willful blindness regarding his income and expenses.
[53] In balancing the rehabilitative objectives of the BIA with the interests of the creditor and the public as a whole, and in exercising my discretion, in my view, Mr. Reid should be required to pay the sum of $26,005.88 in surplus income as a condition of his discharge.
Conclusion
[54] The Court orders:
a) That the bankrupt be granted a conditional discharge upon paying the sum of $26,005.88 in surplus income to the Trustee for the benefit of his creditor, with minimum payments of $500.00 per month commencing June 1, 2020; and
b) That the bankrupt file his income tax returns and pay the income taxes owing while undischarged and provide proof to the Trustee.
Master Fortier Registrar in Bankruptcy
Released: March 23, 2020
Footnotes
[1] (Affidavit of Sui Xin Zhu September 27, 2019 at para. 28).
[2] Re Goodman, [1995] O.J. No. 72 at paras. 1, 10.
[3] Re Robb, 2015 CarswellAlta 40, at para. 6.
[4] Re Robb at para. 6.
[5] Re Braithwaite (2005), 16 C.B.R. (5th) 17 (N.B. Reg.) at para. 26;
[6] Re Trueman, 2001 ABQB 377, 25 C.B.R. (4th) 124 (Alta Q.B.) at para. 15;
[7] Re Toal, 20 C.B.R. (3d) 120 (Alta. Reg.) at para. 15;
[8] Re Stewart, 4 C.B.R. (3d) 240 (B.C. CA) at paras. 11 & 12;
[9] Re Somers, 28 C.B.R. (3d) 140 (Ont. S.C.) at para. 18; and
[10] Saran (Re), 2018 ONSC 6045 at para. 170