Working Income Tax Benefits
June 26, 2009
The Working Income Tax Benefit (WITB) is a refundable tax credit that was created in the Budget and Economic Statement Implementation Act, 2007 (S.C. 2007, c. 35, s. 42). It is intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce.
We recently received an inquiry about how these tax credits are to be treated in bankruptcy. Are they to be considered as income for the purpose of calculating surplus income obligations or are they to be considered as property of the bankrupt and, therefore, form part of the estate of the bankrupt?
Nature of the Tax Benefit
According to s. 122.7 of the Income Tax Act (ITA), where a claim is made for the WITB by an eligible individual who files an income tax return, the ITA deems that individual to have paid the amount calculated under s. 122.7 of the ITA on account of taxes payable. Since taxes payable can only be derived from revenue generated during the year by the individual, any amount claimed as a WITB is considered to be an overpayment of income tax by the individual.
Details concerning who is eligible for the WITB and how it is calculated are available at http://www.cra-arc.gc.ca/bnfts/wtb/menu-eng.html.
How is the WITB made Available?
There are two ways in which the WITB is made available to eligible claimants: through the issuance of income tax refunds or by way of advance payments of the WITB. Any advance payment is then deducted from the total WITB amount due to the individual at the end of the fiscal year. If the advance exceeds what is owed to the taxpayer under the WITB at the end of the fiscal year, the Canada Revenue Agency will deduct the difference from any income tax refund or GST credits due to the individual.
WITBs in Bankruptcy
Subsection 122.7(11) of the ITA expressly addresses the calculation of WITB claims in bankruptcy. It provides as follows:
(11) For the purpose of this subdivision, if an individual becomes bankrupt in a particular calendar year
(a) notwithstanding subsection 128(2), any reference to the taxation year of the individual (other than in this subsection) is deemed to be a reference to the particular calendar year; and
(b) the individual’s working income and adjusted net income for the taxation year ending on December 31 of the particular calendar year is deemed to include the individual’s working income and adjusted net income for the taxation year that begins on January 1 of the particular calendar year.
The effect of subsection 122.7(11) is to ensure that the calculation that is made to determine a WITB is comprised of the income of the individual during the entire calendar year and not only some portion of it based on the date of bankruptcy.
On July 7, 2008, certain amendments to the Bankruptcy and Insolvency Act (BIA) came into force, including an amendment to s. 67(1) regarding the treatment of pre- and post-bankruptcy income tax refunds. Section 67(1)(c) now provides as follows:
67. (1) The property of a bankrupt divisible among his creditors […]
(c) all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year — or the fiscal year of the bankrupt if it is different from the calendar year — in which the bankrupt became a bankrupt, except the portion that
(i) is not subject to the operation of this Act, or
(ii) in the case of a bankrupt who is the judgment debtor named in a garnishee summons served on Her Majesty under the Family Orders and Agreements Enforcement Assistance Act, is garnishable money that is payable to the bankrupt and is to be paid under the garnishee summons, and …
The amendments to s. 67(1)(c) of the BIA expressly make pre- and post-bankruptcy income tax refunds property of the bankrupt that is divisible among creditors. Furthermore, since s. 122.7 of the ITA is not exempt from the provisions of the BIA, the OSB takes the position that any pre- and post-bankruptcy income tax refunds that include WITB claims constitute property of the bankrupt under s. 67(1)(c) of the BIA.
In terms of any subsequent income tax refunds that include the WITB, the OSB takes the position that they are governed by s. 68 for the purpose of calculating surplus income payments, if any.
To summarize, the OSB takes the following positions:
- pre- and post-bankruptcy income tax refunds that include WITB vest in the trustee pursuant to paragraph 67(1)(c) of the BIA;
- subsequent income tax refunds that include WITB are to be included in the calculation of surplus income under s. 68 of the BIA.