John Briggs Armstrong (Re), 2015 BCSC 1167

IN THE SUPREME COURT OF BRITISH COLUMBIA in bankruptcy Citation: John Briggs Armstrong (Re), 2015 BCSC 1167 Date: 20150619 Docket: B092123 Registry: Vancouver In the Matter of the Bankruptcy of John Briggs Armstrong Before: The Honourable Mr. Justice Fitch Oral Reasons for Judgment In Chambers Counsel for the Trustee, L.W. Murphy Ltd.: Peter C. Lee Counsel for the Attorney General of Canada on behalf of Canada Revenue Agency, a Creditor: Kirat K. Khalsa Place and Date of Hearing: Vancouver, B.C. May 28, 2015 Place and Date of Judgment: Vancouver, B.C. June 19, 2015 A.

Introduction [ 1 ] The issue that arises on this application is whether the Canada Revenue Agency ("CRA") is precluded by the provisions of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3, (the " BIA ") from taking remedial steps under the Income Tax Act , R.S.C. 1985, c. 1 (5th Supp.) (the " ITA" ), to recover post-bankruptcy tax arrears owed by the bankrupt, John Briggs Armstrong. [ 2 ] The application is brought by the trustee, L.W.

Murphy Ltd., who asserts, inter alia , that steps the CRA has taken to recover the bankrupt's post-bankruptcy tax arrears are unlawful, having regard to the stay of proceedings that is in effect pursuant to s. 69.3(1) of the BIA . The CRA argues that the remedial steps taken to recover post-bankruptcy tax arrears are not caught by the stay of proceedings contemplated by s. 69.3(1) because it is not a claim provable in the bankruptcy. B. Background [ 3 ] The factual background relevant to the resolution of this application is largely uncontentious. [ 4 ] The bankrupt is a medical doctor.

He derives income from the provision of medical-legal opinions and by testifying in court as a medical expert. [ 5 ] On April 29, 2009, Dr. Armstrong filed an assignment into bankruptcy.

Todd McMahon Inc. was appointed trustee. [ 6 ] In September 2009, the CRA submitted a proof of claim to the trustee setting out the income tax arrears owed by the bankrupt as of the date of the assignment. [ 7 ] As of the date of the assignment, the bankrupt owed $496,965.66 in personal income tax for the taxation years 2002 to 2008. [ 8 ] On February 2, 2011, Todd McMahon Inc. was discharged as trustee. [ 9 ] The bankrupt has not been discharged from bankruptcy. [ 10 ] Following the discharge of Todd McMahon Inc., the CRA made unsuccessful efforts to collect income tax arrears owed by the bankrupt for the taxation years 2002 to 2008. [ 11 ] On March 9, 2015, the applicant was appointed trustee of the bankrupt's estate. [ 12 ] Since that date, the CRA has not taken any steps to collect tax arrears owed by the bankrupt for the taxation years 2002 to 2008, or for the pre-bankruptcy portion of the 2009 taxation year (January 1 to April 30, 2009).

[13] The bankrupt also owes tax arrears for all of the taxation years following the date of his assignment in bankruptcy. As of May14, 2015, the bankrupt owes $411,135.38 for taxes, interest, penalties, and administrative charges for the post-bankruptcy taxation years;in other words, from May 1 to December 31, 2009, and for the calendar years 2010, 2011, 2012 and 2013. [14] In March and April 2015, the CRA issued 18 requirements to pay to third-party clients of the bankrupt. The requirements topay were issued under the authority of s. 224 of the ITA.

The requirements to pay direct the bankrupt's clients to remit to the ReceiverGeneral 100 per cent of the amounts they owe the bankrupt. All of the requirements to pay relate to personal income tax arrears owed bythe bankrupt in respect of the post-bankruptcy taxation years.

To date, the CRA has received three payments totalling $12,000 inresponse to the requirements to pay notices. [15] Against this background, the applicant/trustee seeks the following orders: 1) A declaration that every requirement to pay issued by the CRA was void and of no effect when it was issued and/or when apayment was received by the CRA in accordance with it; 2) A declaration that unless and until an order has been made exempting the CRA from the stay of proceedings in this bankruptcy,and that order is served on a present or future recipient of a requirement to pay, any present or future debtor to the bankrupt may ignoreany requirement to pay when paying its debt to the bankrupt or to his trustee in bankruptcy; and 3) an order that the CRA immediately pay to the trustee in bankruptcy the sum of $12,000 or such greater amount as may havebeen received by it in response to requirements to pay issued up to the hearing date of this application.

C. The Position of the Applicant/Trustee [16] The applicant/trustee submits that the remedial steps taken by the CRA to collect post-bankruptcy tax arrears owed by thebankrupt (the issuance of the requirements to pay to third parties who owe money to the bankrupt for services rendered), are caught bythe stay of proceedings imposed under s. 69.3(1) of the BIA.

That subsection reads: Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against thedebtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claimprovable in bankruptcy. Subsection 69.3(1.1) provides that the stay of proceedings ceases to apply in respect of a creditor on the day on which the trustee isdischarged. Subsection 69.3(2) is not relevant to this case. [17] Relying on Vachon v.

Canada Employment and Immigration Commission, (SCC), [1985] 2 S.C.R. 417, theapplicant/trustee emphasizes that a broad and purposive meaning must be given to the scope of the stay of proceedings that comes intoeffect pursuant to s. 69.3(1) of the BIA. [18] The applicant/trustee also submits that s. 69.3(1) has two parts which are separated by the second "or" that appears in theprovision. In the result, it is said that the

section bars creditors from doing two things: (1) pursuing any remedy against the debtor or thedebtor's property; and (2) commencing or continuing any action, execution, or other proceedings for the recovery of a claim provable inbankruptcy. In other words, the applicant/trustee submits that the concluding phrase of the subsection, "for the recovery of a claimprovable in bankruptcy", is intended to modify only the second part of the provision.

Accordingly, it is argued that the CRA, even if it isonly pursuing recovery of a post-bankruptcy indebtedness, is nevertheless pursuing a remedy against the debtor or the debtor's propertycontrary to the first part of s. 69.3(1), and is precluded from doing so by the stay of proceedings. [19] Finally, the applicant/trustee asserts that permitting the CRA to pursue its statutory garnishment remedy with respect topost-bankruptcy debt would frustrate attainment of the objectives underlying the BIA; namely, equitable distribution of the bankruptdebtor's assets among the estate's creditors inter se, and the financial rehabilitation of insolvent individuals.

D. Analysis [20] The following additional provisions of the BIA put the issue that arises on this application in greater context:

Definitions 2. In this Act, ... "claim provable in bankruptcy", "provable claim" or "claim provable" includes any claim or liability provable in proceedings under thisAct by a creditor; ... "creditor" means a person having a claim provable as a claim under this Act; ... "property" means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and

every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description ofestate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property; ... Property of bankrupt 67.

(1) The property of a bankrupt divisible among his creditors shall not comprise . . . [exemptions omitted] but it 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 thebankrupt before their discharge . . . ... General Provisions Precedence of bankruptcy orders and assignments 70.

(1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments,garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors,executions or other process against the property of a bankrupt, except those that have been completely executed by payment to thecreditor or the creditor's representative, and except the rights of a secured creditor. ... Claims provable 121.

(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankruptor to which the bankrupt may become subject before the bankrupt's discharge by reason of any obligation incurred before the day onwhich the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act. [21] The stay of proceedings that comes into effect pursuant to s. 69.3(1) operates as against the recovery of a claim provable inbankruptcy.

Indebtedness incurred by a debtor after an assignment into bankruptcy is not a claim provable in bankruptcy: Richardson &Co. v. Storey (1941), (ON SC), 23 C.B.R. 145, [1942] 1 D.L.R. 182 (Ont. S.C.); Canadian Petcetera LimitedPartnership v. 2876 R Holdings Ltd., 2010 BCCA 469 at para. 31. [22] A party who is owed money for debts incurred both before and after the bankruptcy may seek remedies to recover that portionof the debt incurred after the assignment into bankruptcy: Edward v. Niagara Neighbourhood Housing Co-Operative Inc., (ON SCDC), [2006] O.J. No. 1984, 23 C.B.R. (5th) 71, at paras. 22 and 25-28.

The debts incurred post-bankruptcy are not claimsprovable in the bankruptcy and, with respect to those debts, the party owed money is not a "creditor" within the meaning of the BIA. [23] These general propositions apply equally with respect to income tax liability incurred during periods following an assignmentinto bankruptcy. In Re Mutter, 2014 ABCA 176, 14 C.B.R. (6th) 163, the court dealt with arguments similar to those that have beenraised by the trustee on this application. The facts of the case may be briefly stated. Mutter made an assignment into bankruptcy partlyas a result of unpaid tax debts.

His residence was sold to satisfy his debts. There was a surplus available from the disposition of hishome. While he was an undischarged bankrupt, Mutter failed to remit or pay income tax incurred after the date of the assignment intobankruptcy. The Minister of National Revenue caused a requirement to be paid to be issued to the trustee, who was holding the surplusfunds, in an effort to recover post-bankruptcy tax debts. One of the issues that arose in the case was whether Mutter's post-bankruptcytax debts were provable in bankruptcy.

For the reasons excerpted below, the court held that Mutter's post-bankruptcy tax debts were notclaims provable in the bankruptcy and that s. 69.3(1) of the BIA did not foreclose the remedial action taken by the CRA: 12. It can be seen that s. 121 "deems" two types of claims to be provable in bankruptcy. Both types of claim must relate to obligationsthat existed on the date of bankruptcy.

Newfoundland and Labrador v AbitibiBowater Inc., 2012 SCC 67at para. 26, [2012] 3 SCR443 summarized the three requirements for a debt provable in bankruptcy: "First, there must be a debt, a liability or an obligation to acreditor. Second, the debt, liability or obligation must be incurred before the debtor becomes bankrupt. Third, it must be possible toattach a monetary value to the debt, liability or obligation." The post-bankruptcy tax debts in issue here do not qualify, as they relate toobligations arising in taxation years after the bankruptcy. ... 14.

It follows that the post-bankruptcy tax debts in issue in this appeal are not claims provable in the bankruptcy, and the Minister isnot a creditor for purposes of this bankruptcy. This

interpretation is supported by the case law, which holds that post-bankruptcy debtsare excluded: Davis v Davidson, 2003 ABPC 81, 42 C.B.R. (4th) 8; Richardson & Co. v Storey, (ON SC), [1942] 1D.L.R. 182, (1941) 23 C.B.R. 145 (Ont SC); Venneri v Bomasuit, (ON SC), [1951] 1 D.L.R. 399, (1950) 31 C.B.R. 150(Ont SC); Black v Rob, [2012] O.J. No 6625 (Sup Ct Just), [2007] O.J. No 2904; Harvey Kalles Real Estate Ltd. v Bleeman, [2007] O.J.No 2904 at para. 3. [24] The reasoning in Mutter is applicable to the case at bar.

It also supports the proposition advanced in Edwards that a party whois owed money for debts incurred both before and after the bankruptcy may seek remedies to recover that portion of the debt incurredafter the assignment into bankruptcy. In other words, the same party can be a "creditor" within the meaning of the BIA with respect todebts incurred prior to the bankruptcy, but not a "creditor" under the Act with respect to post-bankruptcy debts, because post-bankruptcyclaims are not provable in bankruptcy. I agree with counsel for the CRA that the nature of the claim, not the identity of the claimant,

determines whether remedial action is precluded by the stay of proceedings that comes into effect under s. 69.3(1). [25] The same result was reached in Gollner v. Canada (Customs and Revenue Agency), (ON SC), [2003] O.J.No. 3309, 45 C.B.R. (4th) 76 (Ont. S.C.J.), wherein the following observations were made: Under the scheme of the ITA, when a bankruptcy occurs, the current taxation year of the bankrupt comes to an end on the day before thebankruptcy and a new taxation year begins on the date of the bankruptcy and ends on December 31st of that year.

Separate income taxreturns must be filed for each of these two taxation years within a single calendar year: the pre-bankruptcy return by the trustee inbankruptcy; the post-bankruptcy return by the bankrupt. Income tax liability for the period before the bankruptcy is a claim provable inthe bankruptcy. Under ss. 178(2) of the BIA, an order of discharge will release the bankrupt from all claims provable in bankruptcy,subject to certain exceptions specified in ss. 178(1).

Income tax liability for the period following the bankruptcy is not a provable claim. [26] In light of this well-established body of jurisprudence, I cannot accede to the applicant/trustee's position that the remedial actiontaken by the CRA in this case is precluded by s. 69.3(1) of the BIA. The bankrupt's post-bankruptcy tax debts are not claims provable inthe bankruptcy and are not captured by the stay of proceedings the subsection contemplates. [27] Further, I cannot interpret the language of s. 69.3(1) in the manner suggested by the applicant/trustee.

The applicant/trustee'sposition on this point is, in my view, inconsistent with the grammatical structure of the provision. It is also consistent with the holding inCanadian Petcetera that the concluding phrase, "for the recovery of the claim provable in bankruptcy", modifies the whole of theprovision.

As the Court of Appeal noted in Canadian Petcetera (at para. 29), if it was intended that the concluding phrase modify onlythe immediately preceding phrase, there would be no comma after the word "proceedings". [28] In addition, I cannot accept the applicant/trustee's argument that the general provisions of s. 70 of the BIA oust the clear andspecific language used in s. 69.3(1). The applicant/trustee has advanced no authority in support of this proposition.

Acceptance of theapplicant/trustee's position would effectively overrule well-established authority directly on point. [29] Finally, I cannot accept the applicant/trustee's assertion that Vachon must be read as foreclosing the remedial steps the CRA hastaken in the case at bar to recover the bankrupt's post-bankruptcy tax arrears. In my view, the case is distinguishable on its facts. Thosefacts may be briefly stated. Before making an assignment in bankruptcy, Vachon received an overpayment of unemployment insurancebenefits.

At the time of the bankruptcy, he owed the Canada Employment and Immigration Commission (the "Commission") theamount of the overpayment. Importantly, the parties agreed that what Vachon owed the Commission was a debt incurred prior to thebankruptcy. As such, it was a claim provable in bankruptcy and the Commission filed its proof of claim with the trustee. During thebankruptcy, unemployment insurance benefits became payable to Vachon. Rather than paying all of these benefits to him, theCommission withheld the sum owed by Vachon as a consequence of the pre-bankruptcy overpayment.

On the facts in Vachon, there canbe little doubt that the Commission, by setting off the amount of the pre-bankruptcy overpayment as against the amount Vachon wasowed, was taking action to recover what it acknowledged to be a claim provable in bankruptcy.

The issue in the lower courts waswhether the setoff was a remedy against the debtor or his property or an action, execution, or other proceeding that was subject to thestay of proceedings under what was then s. 49(1) of the BIA [now s. 69.3(1)]. [30] Against this background, the court framed the following question for determination on the appeal: [D]oes the recovery of an overpayment by retention from subsequent benefits, applied by [the] respondent, constitute within the meaningof s. 49(1) of the Bankruptcy Act a remedy against the debtor or his property, an action, execution or other proceeding which had beenstayed except, as provided by this section, with leave of the Court or on such terms as the Court might impose? [31] The issue in Vachon was not whether the CRA had a claim provable in the bankruptcy (it did), but whether the setoff was: (1) apurely administrative act, or (2) the execution of a remedy against the debtor or his property or an action, execution, or other proceedingthat was stayed upon bankruptcy.

What Vachon decides is that when a stay of proceedings is in effect, it should be given broad scopeconsistent with the objectives underpinning the BIA.

But Vachon does not address, nor can it be read as addressing, remedial action thatmay be taken by a party to whom debts are owed that were incurred after the bankruptcy; in other words, claims not provable in thebankruptcy. [32] I turn next to consider the applicant/trustee's broader policy-based concerns and, specifically, the contention that permitting theCRA to resort to the statutory garnishment power it has under the ITA risks frustrating achievement of the objectives underpinning theBIA.

A similar argument was advanced and rejected in Mutter in the following passages: Application of the BIA to the Enforcement of Post-Bankruptcy Debts [15] The amicus curiae appointed to oppose this appeal argued that the BIA might still apply to post-bankruptcy debts, even if theyare not provable in bankruptcy. He noted that the scheme for the orderly liquidation of assets would be disrupted if the post-bankruptcyclass of claimants could still use creditors' remedies. It would follow that the stay in s. 69.3 should still apply.

Further, the policy of theBIA to rehabilitate debtors would be undermined if the exemptions were lost. Thus s. 67(1)(

b) should still apply. [16] It can be acknowledged that the BIA does not deal seamlessly with the collection of post-bankruptcy debts that are not provablein bankruptcy. The BIA does not contemplate that an insolvent debtor who takes refuge in the bankruptcy regime would continue to runup debts, at least without notice to creditors: s. 199(a). An undischarged bankrupt has very limited access to credit, apart from situations(like tax remittances) where debts can be generated without the specific consent of the creditor. The concerns raised by the amicuscuriae are genuine. However, the broad policy considerations behind the BIA cannot override its specific wording. [17]

Section 121, which defines claims "provable in bankruptcy", is complemented by the definition of "creditor" [in s. 2]: 2. In this Act, "creditor" means a person having a claim provable as a claim under this Act;

A person who has a claim, but one that is not provable in bankruptcy, is not a "creditor" for the purposes of the BIA. The BIA addressesclaims "provable in bankruptcy", and the persons who have such claims. This provides certainty as to which claims are discharged bythe process under s. 178(2). Both s. 69.3 and s. 67 refer to "creditors", and it follows that they have no application to those who do nothave claims provable in bankruptcy.

In that sense, the BIA is a closed system and does not deal with these external claims. [33] I see nothing in the language of the BIA or ITA that forecloses the remedial action the CRA has taken with respect to thebankrupt's post-bankruptcy tax arrears. Further, I adopt the reasoning in Mutter as being persuasive and applicable to the circumstancesof the case at bar. [34] Finally, the CRA argues that the applicant/trustee's position rests on the faulty premise that remuneration earned by a bankruptafter his assignment automatically vests in the trustee.

In support of this argument, the CRA places reliance on the judicial

interpretationof the interaction between what are now ss. 67 and 68 of the BIA, most particularly in Marzetti v. Marzetti, (SCC),[1994] 2 S.C.R. 765, and Re Landry, (ON CA), [2000] O.J. No. 3249, 21 C.B.R. (4th) 58 (Ont. C.A.). While I donot disagree with the analysis advanced on behalf of the CRA in relation to this issue, my conclusion respecting the scope andapplicability of s. 69.3(1) disposes of this application without the need to further address this point. [35] For the foregoing reasons, the application is dismissed.

The respondent shall have its costs at Scale B. [36] Any issues arising, counsel? [37] MR. LEE: Might I just point out that CRA, with respect, had to win on both issues, first of all that s. 69.3 does not apply, andthat the accounts receivable are assets which are not owing now by the trustee in bankruptcy. As you mentioned, s. 67(

c) provides thatthe assets of the bankrupt that vest in the trustee include future assets, so these accounts receivable. So the only way in which CRA,having won on the first issue, can get hold of the accounts receivable, if for some reason those accounts receivable are not assets whichhave become vested in the trustee already. [38] THE COURT: Right. [39] MR. LEE: And the only way my friend could think of to try and get around that problem was by invoking s. 68, which youhave found, and I think quite clearly, is not applicable in the present case.

The Mutter case, for instance, funds were available to CRAbecause the debtor was a wage earner, an employee, and therefore his wages, a portion of his wages were exempt for execution andtherefore did not become the property of the bankrupt. So CRA was able to go and attain relief against that portion of the assets beinggenerated by the bankrupt, which didn't go to his trustee but remained with the bankrupt.

But without dealing with the second part of myfriend's argument, that assets are somehow available to CRA, with respect, I don't see how you can come to this result. [40] THE COURT: Assuming that you are correct, Mr. Lee, and that I need to deal with the second part of it, a position that youropposing counsel took a different view of at the hearing of the application, I would have found against you, in any event, because in myview those assets do not automatically vest in the trustee, for the reasons set out in Re Landry and Marzetti. So I am not invitingre-argument of the application. [41] MR.

LEE: I appreciate that, but I'm just -- [42] THE COURT: I appreciate your bringing that to my -- [43] MR. LEE: I think I'd be remiss if I didn't point that out. [44] THE COURT: I appreciate your bringing that to my attention. "FITCH J."