Re Psavka, 2025 ONSC 4888

minicounsel

Court Information

Court File No.: 31-02677757
Date: August 26, 2025
Court: Superior Court of Justice, Ontario
Jurisdiction: In Bankruptcy and Insolvency
Before: Associate Justice Ilchenko, Registrar in Bankruptcy

Parties and Counsel

Bankrupt: Galina Psavka (Realtor), City of Toronto, Ontario

Trustee in Bankruptcy: Steve Welker and Company Inc.
Trustee's Counsel: Allan Fogul

Bankrupt's Counsel: Kenneth Page (current); formerly represented by Robert Klotz, Howard Manis, and Matthew Harris

Opposing Creditor: Robert Kroll (ex-husband of Bankrupt)
Opposing Creditor's Counsel: Ian Klaiman (formerly); self-represented at hearing

Other Parties:

Canada Revenue Agency (CRA) – Creditor, not opposing
Superintendent of Bankruptcy – Not appearing

Procedural History

October 5, 2020: Bankrupt made assignment into bankruptcy as Summary Administration Bankruptcy
March 30, 2021: Initial motion hearing before Registrar Jean; adjournment ordered with conditions
May 11, 2021: Motion adjourned sine die following mediation agreement
November 16, 2021: Section 68 motion returned before Justice Ilchenko
November 19, 2021: Section 68 Order issued (the "100% Order") fixing interim surplus income at $85,386
May 31, 2022: Motion to vary 100% Order adjourned sine die following settlement
July 20, 2023: Initial Special Appointment Case Conference for Discharge
September 28, 2023: Second Case Conference
January 29, 2025: Final Case Conference
May 22, 2025: Discharge Trial heard (full day via Zoom)
June 11, 2025: Common Surplus Income Schedule provided to Court
August 26, 2025: Discharge Decision released

Background and Family Law Proceedings

Prior Family Law Litigation

The Bankrupt was involved in extensive family law proceedings with Robert Kroll, her ex-husband. Justice Gilmore issued a comprehensive decision in Psavka v. Kroll, 2019 ONSC 2009 following a 14-day trial that commenced in 2013. The proceedings involved custody, access, parenting decision-making, parental alienation issues, child support, and spousal support.

Justice Gilmore made significant findings regarding the Bankrupt's conduct:

"Galina was a difficult and confrontational witness. She spent considerable time complaining about Robert and making serious allegations that Robert had committed fraud and made misrepresentations to the court concerning his income. However, when it came to evidence about anything that may have reflected negatively on her, she fought hard to divert, question and stonewall with respect to her answers."

Justice Gilmore found that:

The Bankrupt had a narrow view of the case: "She is right about everything and everyone else is wrong."
She was relentless in criticism of others but refused to accept responsibility for her own conduct
She engaged in unjustifiable extravagance in living, including significant spending on clothing, lingerie, and luxury items
She was not a good money manager and blamed all her financial woes on Robert
She had a pattern of spending everything she had and then demanding more from Robert

Costs Award

In Psavka v. Kroll, 2019 ONSC 3120 (Costs Decision), Justice Gilmore awarded substantial indemnity costs of $138,075 against the Bankrupt in favour of Robert Kroll. This costs award forms the basis of Kroll's proven claim in the bankruptcy estate and constitutes 53% of total proven claims.

Justice Gilmore specifically noted the Bankrupt's unreasonable conduct at trial, including:

Appalling behaviour requiring repeated warnings
Insistence on relying on hearsay and unproven documents
Unwavering insistence on unreasonable positions unsupported by evidence
Refusal to adjust child support when circumstances changed
Breaches of access orders
Failure to provide proper costs submissions

Bankruptcy Estate Details

Assets

As of October 5, 2020, the Bankrupt reported minimal assets:

Asset	Value	Net Realizable Value
Cash on Hand	$0	$0
Furniture (exempt)	$2,000	$0
Personal Effects – Clothing (exempt)	$1,200	$0
Term Life Insurance – Canada Life (Exempt)	$525,000	$0
2020 Honda CRV (Leased)	$1	$0
Total	$3,202	$0

Proven Claims

Total proven claims: $321,780.41

Major creditors:

Robert Kroll (costs award): $169,563.82 (53%)
CRA (Part I tax): $48,373.04
CRA (HST): $58,536.82
Vinay and Sunal Jindal (judgment): $24,216.40
American Express (two cards): $22,374.62
Other creditors: Various smaller amounts

Estate Realization

As of the discharge hearing:

Total receipts: $137,391.63
Surplus income collected: $106,003.22
Garnishment from Sheriff: $24,216.40
Interim Trustee's fees paid: $33,900 (including HST)
Interim dividend to creditors: $9,025
Legal fees paid (taxed): $40,679.24
Trustee's unpaid fees: ~$38,000
Estate counsel's unbilled fees: ~$18,000
Estimated further fees needed: ~$20,000

The Surplus Income Dispute

Initial Surplus Income Agreement

On October 5, 2020, the Bankrupt signed an Initial Surplus Income Agreement with the Trustee providing for monthly surplus income payments of $450.00 commencing October 5, 2020.

The Bankrupt's Initial Income and Expense Statement (Form 65) reported:

Gross Self-Employment Income: $8,333.33
Net Income: $3,691.92
Monthly Surplus Payment: $450.00

Section 68 Motion

The Trustee brought a motion under section 68 of the BIA on March 30, 2021, before Registrar Jean, seeking to fix the Bankrupt's surplus income obligation. The motion was adjourned on terms requiring the Bankrupt to provide income documentation by April 12, 2021, and to pay $25,000 to the Trustee or into court.

Following mediation, a Mediation Agreement was executed on May 10, 2021, providing for:

Additional payment of $25,000 directly to the Trustee
Monthly income and expense statements with backup documentation
Monthly recalculation of surplus income by the Trustee
Adjournment of the motion sine die pending compliance

Breach of Mediation Agreement

The Bankrupt failed to comply with the Mediation Agreement, prompting the Trustee to return the motion on November 16, 2021.

The 100% Order

On November 19, 2021, Justice Ilchenko issued the "100% Order" fixing the Bankrupt's interim surplus income obligation at $85,386, leaving an outstanding balance of $35,386 after crediting the $50,000 already paid ($25,000 to Trustee + $25,000 Estate Solicitor Fund).

The Order directed Royal LePage and any other brokerage or employer to pay:

100% of any funds otherwise payable to the Bankrupt until the outstanding surplus income was fully satisfied
25% of any funds thereafter

Final Surplus Income Calculation

In the 2023 Supplementary Report, the Trustee calculated a final surplus income obligation of $77,771 (or $102,466 including the $24,695 cost award from the section 68 motion).

The Trustee rejected approximately $55,000 of the approximately $147,000 in business expenses claimed by the Bankrupt, including:

100% of rent for primary residence (Trustee permitted 10%, disallowed $29,150)
100% of motor vehicle expenses (Trustee permitted 80%, disallowed $931)
$8,673 of legal fees relating to insolvency matters
50% of meals, entertainment, and LCBO purchases ($4,692)
$11,552 of HST included in claimed expenses

Income and Spending Analysis

Gross Income During Bankruptcy

The Bankrupt reported the following gross income to CRA for tax years 2020-2023:

Year	Gross Commission	Social Assistance	Total
2020 (Pre)	$81,036.85	—	$81,036.85
2020 (Post)	$35,703.85	$11,022.00	$46,725.85
2021	$306,631.00	$25,000.00	$331,631.00
2022	$75,889.90	—	$75,889.90
2023	$55,553.96	—	$55,553.96
Total			$590,836.60

Additionally, the Bankrupt received approximately $85,000 in child support payments from Kroll during the bankruptcy period.

Bank Statement Analysis

Review of the Bankrupt's RBC bank statements for October 1, 2020 to December 31, 2021 revealed:

Opening balance (September 30, 2020): -$17.50
Deposits over $450: At least $421,898.29
Closing balance (December 31, 2021): $139.41

The Bankrupt dissipated virtually all funds deposited, with identified withdrawals including:

Cash withdrawals: $87,126.65
Non-bank ATM withdrawals: $18,118.98
Email transfers: $72,455.61
LCBO purchases: $5,605.05
Clothing boutique purchases: $6,216.82
Total identified withdrawals: $189,854.81

Unexplained Transactions

Of the $189,854.81 in identified withdrawals, the Bankrupt provided explanations for only $84,958, leaving $104,896.81 unexplained or inadequately explained.

Explanations provided included:

Clothing: $9,555
Son's camp: $6,550
Business disbursements: $7,200
Landlord payments: $10,500
Children's living expenses: $7,284
Lawyers: $9,130
Image consultant: $1,080.28
Fitness: $2,519.97
Son's school course: $2,000
Marketing service: $23,142
Furniture: $5,500
Money orders: $24,275 (no further detail)

Tax and HST Non-Compliance

The Bankrupt made no instalment payments of income tax or HST at any time, either before or after bankruptcy, despite:

Earning substantial self-employment income
Receiving accountant letters advising of required instalment payments
Being advised by the Trustee of the obligation to make instalment payments
Signing acknowledgments confirming understanding of tax obligations

Pre-Bankruptcy Tax Debt:

2020 (January-October): $12,295.93 owing
2020 (October-December): $1,983.99 owing

Post-Bankruptcy Tax Debt:

2021: $102,026.55 owing (plus $14,283.72 in penalties and $9,661.38 in arrears interest)
2022: $2,563.61 owing
2023: Amount unclear but significant

The Bankrupt also received COVID relief payments (CERB, CRSB, CRCB) totalling $25,000 in 2021 while earning over $300,000 in commission income, resulting in a $14,000 claw-back by CRA.

Bankrupt's Conduct and Credibility

Testimony at Discharge Hearing

The Bankrupt's testimony at the discharge hearing was characterized by:

Evasiveness and argumentativeness
Interruptions of counsel, the Trustee, and the Court
Discourtesy to all parties
False statements contradicted by documentary evidence
Unsubstantiated allegations of perjury against Kroll
Attempts to relitigate settled family law issues

Contradictory Affidavits

The Bankrupt filed two affidavits (September 26, 2023 and March 20, 2025) containing:

Contradictory income and expense statements
Claims of overpayment of surplus income contradicted by the Trustee's calculations
Allegations that the Trustee calculated surplus income on gross income (plainly false)
Claims that the 100% Order prevented tax remittances (contradicted by evidence that funds were dissipated before the Order)
Assertions of spousal support owing despite Justice Gilmore's 2019 order terminating such support

Unfounded OSB Complaint

The Bankrupt filed a complaint with the Office of the Superintendent of Bankruptcy on November 24, 2021, alleging:

The Trustee and counsel were hostile and unprofessional
The Trustee was withholding commissions without court order
The Trustee was extending special treatment to Kroll

The OSB investigated and found all allegations unfounded in its response dated February 18, 2022.

Legal Analysis

Section 173 Facts Proven

The Court found the following facts under section 173(1) of the BIA proven on the balance of probabilities:

(a) Assets Not Equal to 50 Cents on the Dollar

The Bankrupt's assets were not of a value equal to 50 cents on the dollar of unsecured liabilities. The Bankrupt failed to satisfy the onus of proving this arose from circumstances for which she cannot justly be held responsible.

Grounds:

The costs award from Justice Gilmore was a precipitating factor in the bankruptcy, arising from the Bankrupt's reprehensible conduct in family law proceedings
The Bankrupt's persistent failure to remit income tax and HST installments despite substantial self-employment income
The Bankrupt's unjustifiable extravagance in living, as found by Justice Gilmore

(e) Unjustifiable Extravagance in Living

The Bankrupt contributed to her bankruptcy through unjustifiable extravagance in living. Justice Gilmore's findings regarding the Bankrupt's spending patterns were fully applicable:

"Her mantra appears to be to spend everything she has and then go to Robert for more. If Robert refuses to pay up, Galina blames him for her financial woes."

The Bankrupt's spending during the bankruptcy period, including on clothing, restaurants, spas, and other discretionary items, while not remitting tax or HST, constituted unjustifiable extravagance.

(m) Failure to Comply with Section 68 Requirements

The Bankrupt failed to comply with the requirement to pay surplus income under section 68. Although the Trustee eventually collected $106,003.22 through enforcement of court orders, this was not voluntary compliance. The Bankrupt:

Failed to make the initial $450 monthly payments agreed to
Breached the Mediation Agreement
Required two court orders and garnishment to compel payment
Spent or dissipated funds before the 100% Order took effect

(o) Failure to Perform Duties Under the Act

The Bankrupt failed to perform duties imposed under section 158 of the BIA, specifically:

(b) Failed to deliver all books, records, documents, and papers relating to her property or affairs
(n.1) Failed to inform the Trustee of material changes in financial situation by failing to report irregular income
(o) Generally failed to do all such acts and things as reasonably required by the Trustee

The Bankrupt:

Did not provide accurate income and expense statements for the entire bankruptcy period
Provided contradictory documentation (Exhibits A and E to her 2023 Affidavit)
Failed to account for approximately $104,896.81 of identified withdrawals
Did not provide reliable evidence of her actual lifestyle and spending

Section 4.2 Good Faith Breach

The Bankrupt breached the statutory duty of good faith under section 4.2 of the BIA through:

Lies, half-truths, omissions, and silence regarding surplus income calculation
A four-year campaign to relitigate the surplus income calculation despite it being finally determined
Persistent false claims that the Trustee calculated surplus income on gross income without deducting expenses
Unfounded allegations against the Trustee and counsel to the OSB

Surplus Income Calculation Methodology

The Court upheld the Trustee's methodology for calculating surplus income:

Formula Applied:

Gross Commission Income
Less: Accepted Business Expenses (per Income Tax Act standards)
Less: Estimated Income Tax and HST Payable
Equals: Net Income Subject to Surplus Income Calculation

Key Findings:

Business Expenses: The Trustee properly applied Income Tax Act principles in determining allowable business expenses. The Bankrupt's claims for 100% of home rent and 100% of vehicle expenses were unreasonable and inconsistent with tax jurisprudence (Dale v. The Queen, Jha v. The Queen).
Tax Deductions: The Trustee credited the Bankrupt with estimated tax and HST payable despite the Bankrupt never actually making instalment payments. This was generous to the Bankrupt, as the Surplus Income Directive only requires deduction of "minimum statutory remittances and instalment tax payments made."
HST: The Trustee properly excluded unremitted HST from claimed expenses, as HST is the property of the Crown under the Excise Tax Act and cannot be deducted as a business expense.

Kozack v. Richter Doctrine

The Court applied the doctrine from Kozack v. Richter (1973) regarding bankruptcies filed to avoid judgment debts arising from reprehensible conduct.

The Bankrupt's bankruptcy was precipitated by the substantial costs award from Justice Gilmore, which arose from the Bankrupt's reprehensible conduct in family law proceedings. The Bankrupt cannot be permitted to use the bankruptcy process to entirely escape the financial consequences of that conduct.

Tax Debt Principles

The Court applied principles from Re Reid, Re Zhao, R v. Whissell, and Re Somers regarding tax debts:

A tax avoider should not be able to use the bankruptcy system to escape payment
A bankrupt who does not pay taxes is not an honest and unfortunate debtor
The court should not permit a self-earner to run up an income tax liability and then go bankrupt
Income tax is an income-driven liability that must be paid from income that attracts the tax

The Bankrupt's persistent failure to remit installments despite earning substantial income, combined with her post-bankruptcy non-compliance with tax filing obligations, demonstrated conduct for which she can justly be held responsible.

Discharge Decision

Refusal of Discharge Considered but Not Imposed

The Court considered but declined to refuse discharge entirely, despite the Bankrupt's conduct being comparable to cases where discharge was refused (Re Wolf Rubin, Bank of Montreal v. Giannotti).

Reasons for Not Refusing Discharge:

A refusal would not recover amounts for creditors or the Trustee
It would result in future discharge applications with repetition of the same evidence and further court time and expense
The Bankrupt would have opportunity to reapply and potentially demonstrate rehabilitation

However: The Court found the Bankrupt was "a dishonest debtor, and a debtor unwilling to make full disclosure of her financial affairs" and was "not an honest and unfortunate debtor deserving of a fresh financial start."

Conditional Discharge Granted

The Court granted a conditional discharge subject to the following terms:

Payment Conditions

Payment to Estate for Costs: $40,000 primarily for unnecessary costs incurred due to the Bankrupt's actions that creditors ought not bear, and as a substitute for costs awards that could have been issued under Kaptor and Bannikova principles
Surplus Income Payment: $36,463 (calculated as $40,000 less the $3,537 alleged overpayment credited by the Trustee), fixed as a surplus income amount under section 68(11), (13), and (14) of the BIA
Percentage of Proven Claims: 20% of proven claims = $64,356.08, which constitutes a chose in action assignable by the Trustee to creditors under section 38 of the BIA

Total Payment Obligation: $100,819.08

Timeline: Payments must be made within 12 months of the Order, or the Trustee may proceed to discharge. If the payment conditions are assigned to creditors under section 38, the Trustee may proceed to discharge once all duties under the section 38 Order are fulfilled.

Non-Payment Conditions

The Bankrupt must file all post-bankruptcy personal income tax returns and any applicable HST returns during the period she remains undischarged
The Bankrupt must provide proof of filing of all returns with the Trustee
Clarification: The Court specifically stated it is NOT requiring the Bankrupt to remain undischarged if she cannot prove payment of post-bankruptcy HST and income tax, as this would be impossible given the assessed income tax debt and likely further HST debt

Timeline: These conditions must be met within 12 months of the Order, or the Trustee may proceed to discharge.

No Suspension Period

The Court declined to impose an additional suspension period, noting the Bankrupt had already remained undischarged for approximately 5 years, and a suspension would be of no utility.

Costs

The Court ordered:

Parties (other than Trustee): Each party bears its own costs of the discharge hearing, as the result was a divided success with no party obtaining all relief requested
Trustee: The Trustee may be paid its costs and the costs of counsel for the Trustee out of the estate after ordinary taxation under the regular taxation provisions of the BIA

Key Principles and Findings

Integrity of the Bankruptcy System

The Court emphasized that the integrity of the bankruptcy system must be preserved. The Bankrupt's conduct—including:

Using bankruptcy to avoid a substantial costs award from family law proceedings
Failing to remit tax and HST despite substantial income
Engaging in four years of litigation over surplus income calculation
Making unfounded allegations against the Trustee and counsel

—threatened the integrity of the system and required meaningful conditions on discharge.

Duty of Good Faith

The Court applied section 4.2 of the BIA (duty of good faith) to sanction the Bankrupt's conduct. The Bankrupt's persistent false claims about surplus income calculation, despite clear documentary evidence to the contrary, constituted a breach of the duty to act honestly, candidly, and forthrightly in bankruptcy proceedings.

Surplus Income as Mandatory Regime

The Court emphasized that section 68 and the Superintendent's Directive 11R2-2021 create a mandatory regime for calculating and collecting surplus income. The Bankrupt's duty to provide accurate financial disclosure is fundamental and not the responsibility of the Trustee to enforce through litigation.

Self-Employed Income and Tax Obligations

The Court stressed that self-employed individuals earning substantial income have a personal obligation to remit income tax and HST installments. The Bankrupt cannot blame the Trustee for her failure to do so, and the bankruptcy system should not reward such conduct.

Matrimonial Proceedings and Bankruptcy

The Court applied the Kozack v. Richter doctrine to prevent the Bankrupt from using bankruptcy to escape the financial consequences of her reprehensible conduct in family law proceedings. The substantial costs award from Justice Gilmore was a legitimate debt that the Bankrupt cannot entirely avoid through bankruptcy.

Conclusion

The Bankrupt's discharge was conditional upon payment of $100,819.08 and compliance with tax filing requirements within 12 months. The Court found multiple section 173 facts proven and determined that the Bankrupt's conduct—including failure to comply with surplus income obligations, failure to perform duties under the BIA, unjustifiable extravagance in living, and breach of the duty of good faith—warranted meaningful conditions on discharge to preserve the integrity of the bankruptcy system.

The decision reflects the Court's concern that the Bankrupt used the bankruptcy process to avoid the consequences of her reprehensible conduct in family law proceedings and her persistent non-compliance with tax obligations, while simultaneously engaging in years of litigation to avoid paying her surplus income obligations.