Disability Tax Credit

May 18, 2010

Introduction

The disability tax credit (DTC) is a federal non-refundable tax credit given to (i) disabled individual taxpayers, and (ii) individual taxpayers upon whom disabled individuals are financially dependent and/or for whom they provide care, provided they meet the conditions set out in section 118.3 of the Income Tax Act (ITA).

Over the last few years, a variety of decisions have been rendered in Canada as to the status of the DTC within the realm of the Bankruptcy and Insolvency Act (BIA), but these decisions have failed to establish a clear uniform position across Canada and often appear to be driven by the facts of each case, including the personal situation of the disabled individual and/or those upon whom the disabled individual was financially dependent.Footnote 1

Assignments Filed Prior to July 7, 2008

In practice, the complexities involved in calculating the DTC are such that only where cheques are issued retroactively will they be able to be considered in a bankruptcy file as these are the only cases where the DTC is clearly identifiable.

Trustees are in the best position to assess the facts in an attempt to find the most equitable resolution. Where the result cannot be agreed upon by the parties, it is recommended that current provincial jurisprudence be followed and trustees may want to consider seeking legal advice in that regard, recognizing that the documented evidence within the file of the trustee must substantiate the basis for the conclusion reached.

Assignments Filed After July 7, 2008

On July 7, 2008, amendments to section 67 (1) (c) of the BIA came into force and now stipulate the following in regard to tax refunds in general:

67. (1) {Property of bankrupt} the property of a bankrupt divisible among his creditors…shall comprise

(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

  1. is not subject to the operation of this Act, or
  2. 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 the garnishable money that is payable to the bankrupt and is to be paid under the garnishee summons, …

This new section clearly indicates that for the bankrupt's tax refund for the calendar year the assignment is filed, it is an asset that vests with the trustee unless one of the two exceptions outlined in BIA ss. 67(1)(c) (i) or (ii) exists. Currently, section 118.3 of the ITA does not indicate that the DTC is not subject to the operation of the BIA.Footnote 2 Therefore, if it can be determined that the DTC relates to the year of bankruptcy or a prior year, it will vest with the trustee.

It is recognized by the Office of the Superintendent of Bankruptcy (OSB) that it may, in some cases, be difficult to determine the refund amounts that relate to the year of bankruptcy or prior years. In such cases, trustees are in the best position to assess the facts, including the personal situation of the taxpayer and the factors that led to filing the assignment in bankruptcy, in an attempt to find the most equitable resolution in respect of these tax refunds, recognizing that the documented evidence within the file of the trustee must substantiate the basis for the conclusion reached.

Letters of Comment

While the OSB reserves its right to issue negative letters of comment, it will generally not do so as a result of the treatment of the DTC provided that the decision concerning the DTC is rendered with a high level of professionalism and that the reasons for the decision are well supported in the trustee's file.


Footnotes

Footnote 1

In Re Ford, 2009 NSSC 124 Decision by Registrar Richard W. Cregan, QC, where the taxpayer (bankrupt–debtor) was entitled to monies from a DTC application as a caregiver. The registrar concluded at p. 24 of the decision that "Accordingly, Ms. Ford's caregiver amounts received by the trustee are to be considered as part of her total income under Sect. 68 of the BIA."
In Re Bowerbank–Buckley (2007) Ont. Registrar Diamond Estate 32-149001, where the registrar rendered his decision based on In re Landry (2000) 21 CBR (4th) 58 (Ont. C.A.) and found that the disability tax credits were revenue and therefore governed by Section 68 of the Bankruptcy and Insolvency Act.
In Re Potter 2010 MBQB36 (Brandon Centre), where a debtor received a disability tax credit for his wife who was his dependent and who was, because of her many health afflictions, entitled to the disability tax credit. Registrar Harrison concluded that the funds from the disability tax credit were to be considered as vesting in the trustee as assets of the estate.
This decision was reversed on appeal and the judge found that "the refund generated by the disability tax credits are income and therefore subject to Section 68 of the Act."
In Re Phillips 2010 BCSC 437, Master B.M. Young as registrar concluded that the tax refunds, issued pursuant to eligibility to a disability tax credit pursuant to the debtor's child's entitlement, were to be treated as property of the estate pursuant to Section 67 of the Bankruptcy and Insolvency Act.

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Footnote 2

In Re Ford, the registrar in his decision indicated the following: …I should note that the amendment to paragraph 67 (1) (c) …provides that "any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year…in which the bankrupt became bankrupt" shall be included as property under the section. The registrar goes on to indicate that this will limit the analysis previously done in regard to the DTC.

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