T-180-75
Léo Beauchesne Inc. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Marceau J.—Montreal, December
14, 1976; Ottawa, January 4, 1977.
Income tax Bankruptcy — Discharge of bankrupt
Reassessment of income tax liability after discharge — Unau
thorized deductions in previous years, but not fraud
Whether the tax debt extinguished by the discharge Bank
ruptcy Act, R.S.C. 1970, c. B-3, s. 95(1).
The plaintiff was a discharged bankrupt. The Minister of
National Revenue, after the order of discharge had been grant
ed, reassessed the plaintiff for a tax liability that arose because
of unauthorized deductions from income for two of the taxation
years before the bankruptcy. The four year period allowed by
the Income Tax Act had not expired. (There was no question of
fraud.) During the course of the bankruptcy, the Minister had
been given the required notices, but no notice was given of the
tax debt that had been reassessed after the discharge.
Held, the appeal is allowed. To prove the debt, the Minister
must assess, but the debt exists and it is certainly provable on
its own before assessment, in the same way as any other present
or future debt. The mere fact that the formal requirements of
proof by the Minister differ from those required of other
creditors—who may themselves be subject to various require
ments of form—does not permit the debt to be exempted from
the provisions of the Bankruptcy Act.
INCOME tax appeal.
COUNSEL:
J. LaRocque and M. Desjardins for plaintiff.
H. Richard for defendant.
SOLICITORS:
Courtois, Clarkson, Parsons & Tétrault,
Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following is the English version of the
reasons for judgment rendered by
MARCEAU J.: This action—brought against a
decision of the Tax Review Board which dismissed
plaintiff's appeal against the tax assessment made
against it on March 21, 1972—does not raise any
question of determination of fact. The facts were
all formally admitted or set out in documents duly
filed, which speak for themselves. The problem
raised—on which the Board, for some reason of
which I am not aware, did not rule—is one of law,
which the summary of the facts will easily clarify,
but which may nonetheless be stated forthwith: did
the discharge order given to plaintiff on January 4,
1972, in accordance with the provisions of the
Bankruptcy Act,' have the effect of freeing it from
income tax payments allegedly owed by it for
previous taxation years, that is, 1967 and 1968?
On May 26, 1970 plaintiff, a legally constituted
corporation, availed itself of the provisions of sec
tion 32 of the Bankruptcy Act, R.S.C. 1970, c.
B-3, and made a proposal to its creditors which
they accepted, and which was duly ratified by the
Superior Court, Arthabaska district, Quebec, on
the following October 13. On November 19, 1971,
a notice of final dividend was given to the credi
tors, and on November 25, the trustee was duly
discharged. On January 4, 1972, plaintiff was
granted, by order, its own discharge.
It was not disputed that the provisions of the
Bankruptcy Act were all fully complied with; that
all notices required by the Act were given; and
that the Receiver General for Canada and the
Minister of National Revenue were entered as
creditors on the statement of affairs filed with the
trustee. Defendant, it is true, alleged in her written
pleadings that the Minister of National Revenue
did not receive the thirty-day notice required by
section 108 of c. 14 (120 of c. B-3) for filing and
proving claims, but it was established, to the con
trary, that the Receiver General for Canada and
the Minister of National Revenue were duly noti
fied, and that pursuant to these notices the office
of the Department of National Revenue for the
division of Sherbrooke, which includes the division
of Arthabaska for administrative purposes, in fact
' Chapter 14 of the 1952 Revised Statutes of Canada or
Chapter B-3 of the 1970 Revised Statutes of Canada. For
greater simplicity, I shall refer hereafter to Chapters 14 or B-3
only; note that the texts in issue are identical to each other, but
are found in sections which are numbered differently.
audited the books of the debtor company and filed
a claim, which was accepted. Of course, defendant
did not receive a notice as a creditor of an income
tax debt for prior taxation years, since at that time
none of the assessments to which the company had
been subject was unpaid, and moreover, it should
be noted that the notices sent to defendant were
not all addressed in the same way and to the same
place. However, I still do not see how defendant
could claim not to have been given notice and
made aware of each and every proceeding concern
ing the proposal duly filed by or in the name of
plaintiff. Counsel for the defendant in any case did
not insist on this point.
Accordingly, it was after the discharge judg
ment that the reassessment in question was issued.
There is no need to waste time in analyzing this
reassessment, since plaintiff admitted its validity
strictly from the point of view of the Income Tax
Act: plaintiff had in fact treated amounts of sales
tax, for which it became accountable in the years
1964, 1965, 1966 and 1967 but which it only paid
in 1968, on a special claim by the Customs and
Excise Division of the Department of Revenue
dated August 21, 1968, as expenses deductible
from its income in 1967 and 1968, which it had no
right to do. It is important to note that the reas
sessment did not relate to an original assessment
based on incomplete or false statements: the ques
tion is not one of fraud, but of unauthorized
deductions and of accounting data treated in a
manner which was not in accordance with certain
requirements of the Income Tax Act.
It may now be seen how the question which I
put at the beginning comes about. Plaintiff argued
that this tax debt which the Minister claims from
it was extinguished by the discharge order it
received on January 4, 1972 under the Bankruptcy
Act. Defendant argued that, on the contrary, such
a discharge order could not affect the debt for
which she claims payment.
Surprising as it may seem, the problem raised
does not seem to have been the subject of judicial
decisions, and I could find no authors who had
dealt directly with it. However, its solution appears
to be assisted by the undoubted existence of three
fundamental facts:
(1) The provisions of the Bankruptcy Act are
binding on the Crown in right of Canada (s. 172,
c. 14, now s. 187, c. B-3).
(2) A discharge order based on a proposal made
under Part III of the Bankruptcy Act has the same
scope and the same effect as a discharge order
resulting from a simple bankruptcy (s. 38 of c. 14,
now s. 46 of c. B-3).
(3) A discharge order frees the debtor from all
"provable claims" under the Bankruptcy Act (s.
35(2) of c. 14, now s. 42(2) of c. B-3) except those
expressly exempted (s. 135 of c. 14, now s. 148 of
c. B-3) 2 among which a tax debt not "arising out
of fraud", whether or not it had been subject to an
assessment under the Income Tax Act, is not
mentioned either directly or implicitly.
These three basic facts show that the problem
posed raises, in short, only one question: is the sum
required from a taxpayer under the Income Tax
Act the object of a "provable claim" within the
2 148. (1) An order of discharge does not release the bank
rupt from
(a) any fine or penalty imposed by a court or any debt
arising out of a recognizance or bail bond;
(b) any debt or liability for alimony;
(c) any debt or liability under a maintenance or affiliation
order or under an agreement for maintenance and support of
a spouse or child living apart from the bankrupt;
(d) any debt or liability arising out of fraud, embezzlement,
misappropriation or defalcation while acting in a fiduciary
capacity;
(e) any debt or liability for obtaining property by false
pretences or fraudulent misrepresentation;
(f) liability for the dividend that a creditor would have been
entitled to receive on any provable claim not disclosed to the
trustee, unless such creditor had notice or knowledge of the
bankruptcy and failed to take reasonable action to prove his
claim; or
(g) any debt or liability for goods supplied as necessaries of
life and the court may make such order for payment thereof
as it deems just or expedient.
(2) An order of discharge releases the bankrupt from all
other claims provable in bankruptcy.
meaning of the Bankruptcy Act before an assess
ment concerning it is issued?
The definition of a provable claim is given in
section 83(1) of chapter 14 (s. 95 of c. B-3). It
reads as follows:
95. (1) All debts and liabilities, present or future, to which
the bankrupt is subject at the date of the bankruptcy or to
which he may become subject before his discharge by reason of
any obligation incurred before the date of the bankruptcy shall
be deemed to be claims provable in proceedings under this Act.
Counsel for the defendant voluntarily admitted
the principle that taxes are due at the time when
the income is received. However, he maintained, if
I understand his argument, that the taxpayer is not
"subject" to this debt, within the meaning of sec
tion 83(1) (c. 14) which we have just read, before
the assessment determining the amount is issued.
The assessment, according to him, is an adminis
trative act necessary to make the debtor subject to
the debt, that is, to make it possible that he be
required to pay, because before then, the Minister
not only does not know of the existence of the debt,
but he would not be permitted by law to claim
payment thereof in justice.
Such a line of reasoning does not appear to me
to be acceptable. Assessment is a specifically regu
lated administrative act, but there is no basis, in
my opinion, for saying that it is more than the
determination of a tax debt and a claim for it in
the form required by law. To prove the debt, the
Minister must assess, but the debt exists and it is
certainly provable on its own before assessment, in
the same way as any other present or future debt.
The mere fact that the formal requirements of
proof by the Minister differ from those required of
other creditors—who may themselves be subject to
various requirements of form—does not, in my
opinion, permit the debt to be exempted from the
provisions of the Bankruptcy Act. It is true that it
may be difficult in practice for the Minister to act
within the period allowed in section 108 (c. 14) in
the case of all taxpayers who use the Bankruptcy
Act, but that is a consideration which Parliament
could have weighed in making the law, but which
the judge, charged strictly with enforcing the law,
cannot deal with. Further, it should be noted that
the legislator considered the special situation of
the Minister, as seen particularly in subsection (3)
of section 108 of chapter 14 (120 of c. B-3) 3 , and
the judge cannot, by far-fetched interpretation,
seek to go beyond what appears on this deliberate
and clearly expressed level.
Counsel for the defendant believes it to be unac
ceptable that an Act such as the Bankruptcy Act
could have the effect of granting a taxpayer a
considerable advantage which no one else could
claim: that of being sheltered from any supplemen
tal claim for taxes owed but not paid, before the
expiry of the period of four years in section 46(4)
of the Income Tax Act, if he is not found guilty of
any fraud. It seems to me, on the contrary, that
such a result is most understandable, if one consid
ers that one of the essential objectives of the
present bankruptcy legislation is to permit a citi
zen who is honest but unlucky in business to obtain
a discharge of his debts: this gives him the oppor
tunity for a new beginning, which accordingly
should be as complete as possible.
Plaintiff's action appears to have merit, and
judgment will be rendered accordingly.
3 120. (3) Notwithstanding subsection (2), a claim may be
filed for an amount payable under the Income War Tax Act or
the Income Tax Act within the time limited by subsection (2)
or within ninety days from the time the return of income or
other evidence of the facts upon which the claim is based is
filed or comes to the attention of the Minister of National
Revenue.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.