GST/HST credit payments in bankruptcy

, and updated

Issue

The Office of the Superintendent of Bankruptcy (OSB) would like to clarify: 

  1. the application of section 67 of the Bankruptcy and Insolvency Act (BIA) and Rule 59 of the Bankruptcy and Insolvency General Rules (the Rules); and 
  1. whether a trustee can take an assignment of goods and services tax/harmonized sales tax (GST/HST) credit payments from a bankrupt.

Application of Section 67 of the BIA and Rule 59: Property Divisible among Creditors and GST/HST Credit Payments 

Where an individual is receiving GST/HST credit payments, it is reasonable to assume that the individual's income is low to moderate. Bankrupts of modest means often do not have sufficient assets to cover the trustee's fees and disbursements 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, the possibility of using GST/HST credit payments to cover the trustee's fees may provide them with better access to the insolvency process.

Subsection 67(1) of the BIA specifies which property of the bankrupt is to be divided among creditors. It also specifies which property should not be divided among creditors, i.e., which is exempt from execution and seizure by the trustee 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 shall not comprise GST/HST credit payments that are made to the bankrupt in prescribed circumstances. Rule 59 prescribes the circumstances for the operation of paragraph 67(1)(b.1) of the BIA. Rule 59, read in conjunction with paragraph 67(1)(b.1), states that the property of the bankrupt divisible among his/her creditors does not comprise GST/HST credit payments if a dividend is available to the creditors without taking that payment into account. Where no dividend is available to the creditors, only that portion of the GST/HST credit payments necessary to cover the trustee’s fees and disbursements can be retained in the context of bankruptcy. The excess portion must be returned to the bankrupt.

Assignment of GST/HST Credit Payments

The OSB would like to clarify whether a trustee can take an assignment of GST/HST credit payments. This question is relevant to situations in which those GST/HST credit payments, as discussed above, are not property of the bankrupt divisible among his creditors, as they were not necessary to make dividends available to creditors, and therefore are exempt. When the property of the bankrupt divisible among his/her creditors comprises the GST/HST credit payments, it vests with the trustee and the bankrupt is no longer able to dispose of or deal with the GST/HST credit payments.

According to Black’s Law Dictionary, an assignment is a transfer or setting over of property, or of some right or interest therein, from one person to another; the term denoting not only the act of transfer, but also the instrument by which it is effected. Footnote 1

Section 67 of the Financial Administration Act (FAA) provides that “Except as provided in this Act or any other Act of Parliament, (a) a Crown debt is not assignable; and (b) no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person any rights or remedies in respect of that debt.” GST/HST credit payments are Crown debts and, therefore, are not assignable.  By statute, it is not possible for parties to contract out of the FAA and assign a GST/HST credit payment. Footnote 2

Furthermore, it is the OSB’s position that the court cannot order a debtor to hand over exempt GST credits (or allow the trustee to continue to receive and keep them) via a discharge order, as that would defeat the exemption. Footnote 3 The OSB is of the view that a request of this nature by the trustee is inappropriate insofar as it allows credits above the threshold to be retained.

One example on how trustees may legally treat GST/HST credit payments would be the following:

  • The trustee receives a GST/HST refund cheque;
  • The GST/HST credit payment is exempt pursuant to Rule 59, as “there are sufficient funds in the estate to result in a distribution to creditors;”Footnote 4

  • The bankrupt agrees to pay an amount equivalent to the GST/HST refund to the trustee;
  • The trustee must provide the GST/HST refund cheque to the bankrupt, regardless of any agreement between them;
  • The bankrupt cashes the cheque, which shall not be cashed by anyone else, regardless of any agreement with the trustee;
  • The bankrupt pays an amount equivalent to the GST/HST refund, or more, by cash or cheque signed in his or her own name.

Position

A trustee’s powers to receive and retain GST/HST credit payments from a bankrupt are limited pursuant to paragraph 67(1)(b.1) of the BIA, Rule 59 and section 67 of the FAA.

Application of Section 67 of the BIA and Rule 59

  1. The basic character of GST/HST credit payments is that they are property exempt from execution or seizure, except if they are required to satisfy the trustee's fees and disbursements. If there is sufficient money to make a dividend available to the creditors, GST/HST credit payments are considered exempt. Then, 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 (paragraph 67(1)(b.1) of the BIA and Rule 59). 
  1. In situations where a dividend would not be available to creditors without using the GST/HST credit payment and where a GST/HST credit payment is necessary to cover the trustee's fees and disbursements, the property of the bankrupt comprises the GST/HST credit payment and may be retained by the trustee. Then, it should be included in the trustee's statement of receipts and disbursements for the purpose of calculating the trustee's fees (Rule 59(3)). 
  1. In situations where a dividend would not be available to creditors without using the GST/HST credit payment and where a portion of the GST/HST credit payment is subject to seizure because it is necessary to cover the trustee's fees and disbursements, 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)).
  1. In situations mentioned in paragraph 3, the threshold for retention of the GST/HST credit payments is the amount allowable to cover the trustee's fees and disbursements. The discharge date of the bankrupt will have no bearing on which GST/HST credit payments can be retained and a bankrupt's discharge should not be delayed by application of this provision (Rule 59(3)). 

Assignment of GST/HST Credit Payments

  1. Pursuant to the FAA, GST/HST credit payments cannot be assigned. Agreements that purport to do so are ineffective and, when administering a bankruptcy, the trustee is to return the GST/HST credit payments to the bankrupt (section 67 of the FAA). As GST/HST credit payments cannot be assigned, it is inappropriate for trustees to request that they be assigned in a conditional order of discharge.

Effective Date

This position will be enforced for bankruptcies filed after March 4, 2019.

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