CRA assessments can have devastating financial consequences that commonly push taxpayers into bankruptcy. In considering bankruptcy, the taxpayer should take into account the extent to which the bankruptcy will impose limitations on the taxpayer’s ability to contest the assessment itself. Section 71 of the Bankruptcy and Insolvency Act (BIA) specifies that a bankrupt ceases to have any capacity to deal with its “property”, which is a broadly defined term and has the effect of virtually eliminating the bankrupt’s ability to maintain legal actions. The extent to which the BIA has a limiting effect on a bankrupt taxpayer’s ability to contest an assessment in the Tax Court of Canada (“TCC”) was at issue in the decision in Schnier (2015 TCC 160).
In Schnier, the Appellant was assessed in the late 1980s, with CRA disallowing tax shelters for each year starting in 1985 and thereafter. The Appellant objected to each assessment but CRA did not confirm the assessments until about 20 years later. The Appellant made various proposals to CRA for payment, but all were ultimately rejected by CRA, resulting in the taxpayer’s bankruptcy. At the end of the Notice of Objection’s process, the CRA’s (likely standard form) letter to the Appellant advised him to file a Notice of Appeal to the TCC if he disagreed with CRA’s confirmation of the assessments. Despite being an undischarged bankrupt, the Appellant filed the appeal. CRA then wrote to the Appellant’s Bankruptcy Trustee inquiring whether the Trustee authorized the Appellant to file the appeal – which it had not. The Trustee took the position that while it did not give explicit permission to the Appellant to file the Notice of Appeal, it would have filed a Notice of Appeal itself (had the CRA not otherwise advised the Appellant to file the appeal itself). The Trustee also indicated that it “authorizes and gives permission to [the Appellant] to pursue the appeal, nunc pro tunc.”
The Crown brought a motion to quash the appeal pursuant to Rule 53(3)(c) to the TCC Rules, which states that “the Court may quash an appeal if… the appellant is without legal capacity to commence or continue the proceeding.” Before the TCC, CRA argued that the appeal should be quashed because the Appellant lacked capacity to commence it, being an undischarged bankrupt under the BIA, and as such, lacking the capacity to deal with his property under the BIA.
In addressing this argument, the TCC first cited a number of cases that concluded that a tax court appeal constituted “property” under the BIA, concluding that the Appellant did not have capacity to commence or continue the appeal without Trustee authorization.
The TCC also concluded, however, that despite the general limitation in s. 71 of the BIA, the Trustee’s after-the-fact authorization was sufficient to conclude that the appeal should not be quashed under Rule 53(3)(c). Specifically, the TCC interpreted the phrase “commence or continue” disjunctively, to imply that even where there was no capacity to commence the action, an appellant may have since gained legal capacity to continue the action, which would be sufficient to avoid triggering the Rule (the evidence confirming that the Trustee had in fact consented to the Appellant’s continuing of the action). In the TCC’s view, therefore, the Rule was not triggered.
In the alternative, the TCC also held that even if it was incorrect in its “disjunctive” interpretation of Rule 53, the evidence established that that the Trustee would have consented had it known that it was required and that this “arguable retroactive implied consent” was sufficient to give the Appellant the legal capacity to have commenced the appeal in the first place. And in the further alternative, the TCC noted that the use of the word “may” in Rule 53(3) arguably gave the TCC the ultimate discretion to allow the continuance of the appeal – even where the appellant is without legal capacity to commence or continue the appeal.
In our view, the TCC correctly dismissed CRA’s motion on this appeal. Although it is hard to fault the Crown for bringing this motion given the state of the law, and the taxpayer’s status of an undischarged bankrupt, the TCC’s clarification of the operation of Rule 53 in these circumstances is welcomed. The TCC’s decision is consistent with the purpose of s. 71 of the BIA, which is to preserve the estate’s assets. A decision which deprived the Trustee’s ability to fight the underlying assessment would have resulted in the complete opposite: it would have prohibited recovery of the estate’s assets from CRA. If the CRA can be faulted, it may be in the 20 year delay in replying to the objections, followed by a perhaps opportunistic motion to quash the corresponding TCC appeal. So from the “equities” point of view, the TCC’s decision was probably also a good one.
Although the TCC’s interpretation provides some reasonable flexibility for the taxpayer to pursue a TCC appeal in the context of a bankruptcy, the case really stands as a reminder to taxpayers that if they are undischarged bankrupts, they need the consent of the Trustee before commencing such appeals. The best practice would seem be to immediately obtain written, explicit authority from the Trustee in Bankruptcy to pursue the appeal. Subject to considerations regarding cost implications of the appeal and chances of success, a reasonable Trustee would likely either agree to pursue the appeal itself or authorize the taxpayer to do so.
This article appeared in the October 2015 edition of Tax for the Owner-Manager.