Leave Must Be Obtained From the Superior Court Before Issuing a Notice of Assessment After a Bankruptcy
On October 21, 2014, the Court of Appeal of Quebec rendered an important judgment in the matter of the bankruptcy of Sylvain Girard (500-09-024077-133) that will have a decisive impact in the handling of bankruptcy cases involving the tax authorities, namely the Agence du revenu du Québec (“ARQ”) and the Canada Revenue Agency (“CRA”).
The Court of Appeal confirmed the decision of the trial judge, the effect of which was to require that the CRA obtain leave from the Superior Court under section 69.4 of the Bankruptcy and Insolvency Act (“BIA”) before issuing a notice of reassessment or amended notice of assessment after the date of the bankruptcy.
In other words, as long as the CRA has not been granted leave by the Superior Court to lift the stay of proceedings, it will not have an assessment that is presumed to be valid and may not be entitled to a percentage of votes as an ordinary creditor equal to the amount of its claim. In effect, the CRA and the ARQ may no longer amend their notice of assessment as they like and vote based on the value of their notice of reassessment.
The facts in this case are relatively simple.
On May 15, 2009, Sylvain Girard declared bankruptcy and in his statement of affairs declared debts totalling $1,742,198.60.
On July 16, 2009, the CRA filed with the trustee a proof of claim for $89,225.43 as a secured creditor.
On January 22, 2010, the CRA filed an amended claim for $731,774.46 in addition to the previous claim, but as an unsecured claim, and a few days later, on January 25, 2010, issued notices of reassessment.
On November 26, 2012, the trustee disallowed the CRA’s proof of claim and stated that the CRA first had to obtain leave from the Superior Court pursuant to section 69.4 BIA.
The trial judge dismissed the CRA’s appeal from the trustee’s decision. Noting that Parliament is presumed to be consistent and logical, he found that the CRA was not exempt from section 69 BIA and must obtain leave from the Superior Court before issuing a notice of reassessment, which is the starting point for the process of challenging a tax assessment.
The Court of Appeal confirmed the trial judge’s decision holding that the CRA had to obtain leave from the Superior Court under section 69.4 BIA since the issuing of a notice of assessment is tantamount to a motion to institute proceedings.
The Court stated that the primary objective of bankruptcy proceedings was to create a single proceeding model to avoid having a more aggressive creditor realize its claim at the expense of the other creditors.
The Court of Appeal also rejected the CRA’s argument that issuing a notice of assessment is an administrative act, in that it does not in itself allow it to recover its debt. The Court of Appeal confirmed that the notice of assessment is the first step in a process leading to the recovery of a tax debt.
In addition, the Court of Appeal settled an issue in the case law by declining to follow the decision in St-Pierre, syndic de, in which the Superior Court had held that the trustee was bound by the notices of assessment and the appeal procedure set out in the tax statutes.
Although the Court of Appeal did not settle the question of whether the Tax Court of Canada has exclusive jurisdiction to determine the quantum of a claim, it confirmed that as long as the stay of proceedings is not lifted, the notice of assessment will not enjoy the presumption of validity and the 90-day period for objecting to it will not begin to run.
On that point, the Court of Appeal noted that a trustee does not have all the information needed for objecting within the short 90-day deadline provided in the Income Tax Act, and this would prompt trustees to object systematically, only to withdraw their objection later, which can be pointless, inefficient and onerous.
The objective of the BIA is to liquidate the assets in the bankruptcy and distribute them quickly and efficiently without the risk that the proceeds of liquidation will be used up entirely by costs, in particular for objecting to a notice of assessment.
The Court of Appeal concluded as follows:
In conclusion, if the CRA submits a claim to the trustee, it may follow it with a notice of assessment. However, because the notice of assessment constitutes a proceeding for the recovery of a provable claim, it will not have the legal effects conferred on it by the ITA unless the CRA obtains leave from the court. In other words, if the CRA wants the procedure for objecting to the notice of assessment that is provided in the ITA to apply, in particular as regards the time for objecting, it must apply to the court and obtain its consent in accordance with section 69.4 BIA.
We believe this judgment will also apply to notice of intention and proposal cases since the provisions concerning stays of proceedings in such cases are similar to section 69.3 BIA which applies in bankruptcy cases.
Given that the judgment was rendered on October 21, 2014, it will be interesting to see whether the Attorney General of Canada will appeal to the Supreme Court of Canada. In the meantime, the judgment of the Court of Appeal will cause significant changes in relations with the tax authorities in insolvency cases and, in some cases, will alter the favourable balance of power that those authorities have enjoyed in some cases.