Disability Tax Credits and Bankruptcy

Disability Tax Credits and Bankruptcy

Bankruptcy can be a trying process, and understanding the implications of disability tax credits during this period can be even more so. This article seeks to shed light on the relationship between disability tax credits and bankruptcy.

What is a Disability Tax Credit?

A Disability Tax Credit (DTC) is a non-refundable tax credit that helps persons with disabilities, or their supporting persons, reduce the amount of income tax they may have to pay. It is aimed at creating greater tax equity by allowing some relief for disability costs, since these are unavoidable additional expenses.

Bankruptcy and the Bankruptcy and Insolvency Act (BIA)

Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. The BIA, on the other hand, is the statute that governs bankruptcy and insolvency in Canada. It outlines the rights and responsibilities of parties involved in bankruptcy proceedings.

Disability Tax Credits and Bankruptcy: What’s the Connection?

In the realm of bankruptcy, unpaid and payable disability tax credits can become part of a bankrupt’s estate in two forms: property and income. If they fall under the category of “property of the bankrupt” within the BIA, they are fully distributable among estate creditors as per the priority scheme established in the BIA. If they are considered “income” within the BIA, they are subject to contribution by the bankrupt based on specific directives or as decided by the Court.

A Case Study: Rafter (Re), 2018 NSSC 331

To illustrate the above, let’s consider the case of Rafter (Re), 2018 NSSC 331. In this instance, Ms. Rafter had undergone two bankruptcy assignments (2005 and 2014) and subsequently, two absolute discharges. Before her second discharge, she applied for and was denied CPP disability benefits. A few years post her second discharge, in 2018, she exited the workforce due to medical advice. Later that year, she applied for disability tax credits, retroactive to 2010, following tax advice. The Canada Revenue Agency (“CRA”) issued a re-assessment and refund for the years 2010 to 2014.

Addressing the Issue: Property or Income?

The critical question here is whether disability tax credits attributable to a time frame before bankruptcy, but paid post the bankrupt’s discharge, are considered property or income. Are they part of the bankrupt’s estate or subject to claims by creditors?

The Registrar examined the language of the BIA and the jurisprudence interpreting that provision to determine that the definition of “property of the bankrupt,” as it applied to tax refunds, only extended to refunds owed to the bankrupt “in respect of the calendar year . . . in which the bankrupt became a bankrupt”. Consequently, only the pre-bankruptcy 2014 refund, being part of the “calendar year” of the bankrupt’s year of bankruptcy (and was a small portion of the refund) is “property of the bankrupt” within the BIA.

Are the Payments Received Considered Income?

On the matter of whether the payments received constituted income, the Registrar held that, based on the wording of section 68 and the related jurisprudence, amounts excluded from the definition of income of a bankrupt included those accrued or earned before bankruptcy but not received between the date of bankruptcy and the discharge date. Therefore, the payments received by the bankrupt post-discharge were not caught by section 68 and did not constitute income of the bankrupt.

What if the Credits Were Claimed Late?

An interesting scenario to consider is if the credits were claimed late through bad faith or to obtain the credit/refund outside of the bankruptcy period. That is, if a bankrupt or a Trustee becomes (or should have become) aware of an unclaimed tax credit or refund before or during the bankruptcy process, but did not chase the issue until discharge, it could be a distinguishing factor or one that the Court could consider when setting discharge terms. However, in this case, the Registrar confirmed no such evidence was presented. In fact, the evidence based on the timeline and the bankrupt’s prior rejection for CPP disability benefits suggested otherwise.

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