Nova Scotia Supreme Court discharges bankrupt with $484,000 debt to tax authority

Decision finds miscalculation by CRA in relation to personal income tax debt

Nova Scotia Supreme Court discharges bankrupt with $484,000 debt to tax authority

The Supreme Court of Nova Scotia granted an absolute discharge to a first-time bankrupt who had a significant tax debt. This discharge hinged on what the court found to be a miscalculation by the Canada Revenue Agency (CRA).

The taxpayer in this case accumulated $484,479.47 in unpaid taxes and penalties. His debt for the 2007–19 period included $334,391.40 in unpaid income tax, interest, and penalties; $39,966.53 relating to Canada Pension Plan (CPP) and Employment Insurance (EI) contributions; and $108,750.25 under the Excise Tax Act, 1985.

On Aug. 11, 2023, he was assigned into bankruptcy. The CRA was his sole creditor.

The CRA classified the taxpayer’s case under s. 172.1 of the Bankruptcy and Insolvency Act, 1985. This provision applied to individuals with over $200,000 in tax debt when that debt made up more than 75 percent of their total unsecured liabilities.

The CRA claimed that $374,357.93 of his debt, representing his non-HST tax debt, made up 76.8 percent of his proven unsecured debt, which would exceed 75 percent. The CRA and the bankruptcy trustee agreed that the taxpayer should not receive an automatic discharge due to this threshold being met.

Absolute discharge granted

In Iyoupe (re), 2024 NSSC 258, the bankruptcy and insolvency court absolutely discharged the taxpayer from bankruptcy because it identified an error in the CRA’s calculation that made its classification of the taxpayer incorrect.

Under s. 172.1 of the Bankruptcy and Insolvency Act, the definition of “personal income tax debt” did not include amounts owed for CPP and EI. Upon excluding these amounts, the taxpayer’s income tax debt only accounted for 69 percent of his total liabilities, which fell below the 75-percent threshold required to trigger s. 172.1, the court explained.

“It is strange to think that if he had no CPP/EI liability (or if no proof of claim was filed for it), he would be within the section; but because those are part of the proven unsecured debt, he isn’t,” said the decision of the bankruptcy court.

The court accepted that the taxpayer timely and fully performed his bankruptcy duties and dubbed him a “model” bankrupt. Specifically, he punctually made administration payments, attended counselling and court appearances, filed all his income and expense statements, and gave the information needed for his tax filings before and after the bankruptcy, the court said.

However, the court expressed reluctance in granting the absolute discharge and only did so through “gritted and begrudging teeth.” The court noted that the taxpayer, who was an independent contractor, had limited economic prospects and had explained the reasons for his liabilities in a confusing way.

Though he appeared to believe that somebody else was remitting his taxes, the court did not find this excuse credible, given that the relevant period was 12 years long. The court added that this belief did not explain the lack of filings.

“It is a cornerstone of our self-reporting tax system that the compliance buck stops with him,” said the bankruptcy court’s decision.

Recent articles & video

Airlines must reimburse passengers according to federal regulations, SCC rules

David Sowemimo: Top 25 influential lawyer advocating for justice

Law Society of British Columbia publishes 2023 annual report

Privacy Commissioner calls for interoperable privacy laws at Alberta committee review

BC Supreme Court declares injuries sustained in two separate car accidents indivisible

Canada endorses global effort for age-assurance standards to protect children's privacy

Most Read Articles

BC Supreme Court rejects employer's attempt to move employment dispute to arbitration

BC Supreme Court dismisses claim to waive solicitor-client privilege in family law dispute

Alberta Court of King's Bench orders sale of estate lands, ending 30-year dispute among heirs

BC privacy commissioner to decide whether to tell Airbnb hosts about requests for their data