GST Credit Payments in Bankruptcy
July 23, 2009
The Office of the Superintendent of Bankruptcy (OSB) would like to clarify the treatment of goods and services tax (GST) credit payments and the application of section 67 of the Bankruptcy and Insolvency Act (BIA) and Rule 59 of the Bankruptcy and Insolvency General Rules in the context of bankruptcy.
The GST credit is a tax-free quarterly payment that helps individuals and families with low and modest incomes offset all or part of the GST they pay. It is a return of income tax that the bankrupt is deemed to have paid.1 "Unlike income tax where the rate increases with income, the GST is levied at the same rate for everyone. As a result, low-income consumers end up paying relatively more of their income in GST than those with higher incomes. To alleviate some of the burden on low-income Canadians, the federal government introduced a GST tax credit. The credit is tied to personal income rather than the amount of GST paid. Besides personal income, the credit amount depends on marital status, number of children, and spousal net income as reported in the previous year's tax return."2
The BIA ensures that all property owned by the bankrupt at the date of bankruptcy or in which he or she, at that date, has a beneficial interest will, with certain exceptions, vest in the trustee for realization by it for the general benefit of creditors and distribution to creditors.3
Subsection 67(1) of the BIA specifies which property of the bankrupt is to be divided among creditors and which is exempt from seizure and kept by the bankrupt. Paragraph 67(1)(b.1) of the BIA states that the property of a bankrupt divisible among his/her creditors does not include goods and services tax credit payments that are made to the bankrupt in prescribed circumstances. Therefore, "paragraph 67(1)(b.1) is a specific exemption extracted from the general scope of property as defined in paragraphs 67(1)(c) and (d) and subsection 2(1) of the BIA".4
Rule 59 prescribes the circumstances for the operation of paragraph 67(1)(b.1) of the BIA. In fact, Rule 59, read in conjunction with paragraph 67(1)(b.1), states that GST credit payments are not property of the estate if a dividend is available to the creditors without taking that payment into account. Only that portion of GST credit payments necessary to cover the trustee's fees can be retained in the context of bankruptcy.
With respect to GST credit payments, the trustee's powers of disposition are limited pursuant to paragraph 67(1)(b.1) of the BIA and Rule 59, which means:
- All property owned by the bankrupt at the date of bankruptcy or in which he or she may, at that date, have a beneficial interest will, with certain exceptions, vest in the trustee for distribution to creditors (s. 67 of the BIA).
- The basic character of GST credit payments is that they are property exempt from execution or seizure; except if they are required to satisfy the trustee's fees (paragraph 67(1)(b.1) and Rule 59).
- If there is sufficient money to cover the trustee's fees, GST credit payments are considered exempt. They should not be included in the total receipts for the purpose of calculating the trustee's fees, and should be returned to the bankrupt (Rule 59(1)).
- Where a GST credit payment is necessary to cover the trustee's fees (in situations where a dividend would not be available to creditors without using the GST credit payment), the GST credit payment can be retained by the trustee and the GST credit payment should be included in the trustee's statement of receipts and disbursements for the purpose of calculating the trustee's fees (Rule 59(3)).
- Where a portion of the GST credit payment is subject to seizure because it is necessary to cover the trustee's fees, only that portion should be included in the total receipts in order to calculate the trustee's fees. The excess portion must be returned to the bankrupt and cannot be included in the total receipts for the purpose of calculating the trustee's fees (Rule 59(2)).
- The threshold for retention of GST credit payments is the amount allowable to cover the trustee's fees. The discharge date of the bankrupt will have no bearing on which GST credit payments can be retained and a bankrupt's discharge should not be delayed by application of this provision (Rule 59(3)).
Where an individual is receiving GST credit payments, it is reasonable to assume that the individual's income is moderate. Furthermore, bankrupts of modest means often do not have sufficient assets to cover the trustee's fees in an assignment in bankruptcy. At the same time, however, it is reasonable to expect that trustees be fairly and adequately compensated for their work. For debtors who cannot afford the cost of bankruptcy, therefore, the possibility of using GST credit payments to cover the trustee's fees may provide them with better access to the insolvency process.
Rule 59 is a mechanism for increasing access to the insolvency system while ensuring adequate compensation to the trustee. Trustees may only retain GST credit payments up to the threshold of their allowable fees and must return all amounts exceeding that threshold. The OSB recommends that trustees inform debtors at the outset of a file that their GST credit payments may be retained by the trustee up to the threshold of their allowable fees even after the bankrupt's discharge.