Kidd (Re), 2023 ABKB 469

Court of King’s Bench of Alberta Citation: Kidd (Re), 2023 ABKB 469 Date: 20230815 Docket: B103 566114 Registry: Edmonton In the Matter of the Bankruptcy of Darren Kevin Kidd _______________________________________________________ Reasons for Decision of W.S. Schlosser, Registrar in Bankruptcy _______________________________________________________ [1] This is a contest between the set-off provisions in the Income Tax Act and a Compelling Order with a tax clause after thedischarge of the trustee.

Cases Cited By the Parties Mitchell v Peguis Indian Band, (SCC), [1990] 2 SCR 85; Financial Administration Act, RSC 1985 c F-11; CrownLiability and Proceedings Act, RSC 1985 c C-50; HSBC Bank Canada v 410086 Alberta Ltd, 2010 ABQB 40; Bankruptcy andInsolvency Act, RSC 1985, c B-3, paras 67(1)(c)(ii), 68(13)(b), 69.3(1.1), 86(1),(2) and (3), 97(3);

Part II of the Family Orders andAgreements Enforcement Assistance Act, RSC 1985, c 4 (2nd Supp), s 24; Garnishment, Attachment and Pension Diversion Act, RSC1985, c G-2; Tax Rebate Discounting Act, RSC 1985, c T-3; Chomistek (Re), 2018 ABQB 434; RJR-MacDonald Inc v Canada(Attorney General), (SCC), [1994] 1 SCR 311; Liberty Mortgage Services Ltd v Canada (National Revenue), 2012ABCA 225;

Interpretation Act, RSC 1985, c I-21; BDO Dunwoody Ltd v Canada (Minister of National Revenue), 2011 MBCA 93;Civil Enforcement Act, RSA 2000, c C-15; PCAS Patient Care Automation Services Inc (Re), 2012 ONSC 3367; Income Tax Act, RSC1985, c 1 (5th Supp) sections 164(2) and 164(2.01); Coopers & Lybrand Limited v Lumberland Building Materials Ltd, (BC SC); Turcotte (Re), 2021 SKQB 162; Decker v Canada (Superintendent of Bankruptcy), 2010 ABCA 189; Bankruptcy andInsolvency General Rules, CRC, c 368; Bankruptcy of Michele Gabrielle, 2014 MBQB 77; Re Garritty (Proposal), 2006 ABQB 238.

By the Court [2] Marzetti v Marzetti, (SCC), [1994] 2 SCR 765; RE McDougall (ABKB) in bankruptcy B201 068001, 25-2068001, Endorsement 2023 03 20 Unreported, Per Mattis R; and Eastern Trust Company v Royal Bank of Canada (NS CA), [1950] 2 DLR 399. Facts [3] The bankrupt, Darren Kidd, assigned into bankruptcy November 28, 2011. The proved unsecured claims approached$300,000.00. Of that, $52,720.35 was tax debt for outstanding income taxes, penalties, and interest to the date of bankruptcy. [4] Mr. Kidd did not perform his duties under the Bankruptcy and Insolvency Act. On October 1, 2015 the Court granted a

Compelling Order, which provided, in part: IT IS FURTHER ORDERED that notwithstanding the discharge of the trustee, Canada Revenue Agency shall forward all subsequentyears income tax refunds of the bankrupt directly to the Trustee and they shall remain with the Trustee until further order of the Court oruntil such time as the bankrupt is granted an Absolute Order of Discharge.

IT IS FURTHER ORDERED that if the bankrupt fails to comply with any of the terms of the Order, the Trustee has leave to proceed toits discharge and creditors’ rights to enforce payment will be reinstated upon the discharge of the Trustee. [5] Mr. Kidd filed his return for the 2013 tax year in May of 2014, resulting in a tax credit of $5,395.77. The Minister remittedthis sum to the trustee pursuant to the tax clause. Three years later, the Court ordered this amount to be paid into the estate to be allocatedto Mr. Kidd’s outstanding surplus obligation. [6] Mr. Kidd did not comply with the Compelling Order.

On April 17, 2018 his trustee, Faber Inc, obtained its discharge. Thishad the effect of lifting the stay pursuant to s 69.3(1.1) of the Bankruptcy and Insolvency Act.

The rights of the creditors were restored. [7] In 2020, the bankrupt filed returns for the 2014 to 2019 taxation years and, in 2021 and 2022, for the 2020 and 2021taxation years . [8] This resulted in refunds totaling $31,681.54. [9] The Minister would like to use her right of set-off under s 164(2) of the Income Tax Act to set-off the tax refund creditagainst its proved unsecured claim of $52,720.35. [10] The trustee, for its part, seeks to be reappointed and to distribute the funds as follows: (a) $4,500.00 to the trustee for a filereactivation fee, (b) $10,830.72 for the balance of Mr.

Kidd’s surplus obligation pursuant to the Compelling Order, (

c) A $2,500.00penalty for the benefit of the estate, and; (

d) the balance, $14,150.82, to be paid to the bankrupt. Argument and Analysis

i) The Trustee [11] The trustee argues that the tax clause binds the Crown. [12]

Section 17 of the Federal

Interpretation Act provides: No enactment is binding on Her Majesty or affects Her Majesty or Her Majesty’s rights or prerogatives in any manner, except asmentioned or referred to in the enactment. [13] The Bankruptcy and Insolvency Act, however, is an exception.

The Bankruptcy and Insolvency Act provides: 4.1 This Act is binding on [His] Majesty in right of Canada or a province. [14] The trustee cites BDO Dunwoody Ltd at para 18: It is well settled that one of the purposes of the BIA is to put all unsecured creditors on the same footing (see s. 141 of the BIA) and thats. 95 is a means of carrying into effect that principle. See Houlden et al. at F§201(2), who point to Hudson v. Benallack, (SCC), [1976] 2 S.C.R. 168 at 175, and Deloitte & Touche Inc. v. White Veal Meat Packers Ltd., 2000 MBCA 120 at para. 6, 153Man.R. (2d) 81, as their authorities.

When the above-mentioned provisions are read contextually and in their grammatical and ordinarysense, harmoniously with the scheme and objects of the BIA and the intention of Parliament, it is my view that s. 4.1 abrogates theCrown prerogative in s. 95 matters. [15] Section 86(1) of the Bankruptcy and Insolvency Act further provides: In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province orof any body under

an Act respecting workers’ compensation, in this

section and in

section 87 called a “workers’ compensation body”,rank as unsecured claims. The exceptions set out in subsection 86(2) and (3) covering deemed trusts and statutory Crown securities do not apply here. [16] This portion of the trustee’s argument is not controversial. [17] The real disagreement has first to do with whether the tax clause in the Compelling Order amounts to a s 68(13) order, whichprovides: 68(13) An order of the court made under this

section may be served on a person from whom the bankrupt is entitled to receive moneyand, in such case, (

a) the order binds the person to pay to the estate of the bankrupt the amount fixed by the order; and

(

b) if the person fails to comply with the terms of the order, the court may, on the application of the trustee, order the person to pay thetrustee the amount of money that the estate of the bankrupt would have received had the person complied with the terms of the order. [18] This flows into the effect of the discharge of the trustee, the end of the stay and restoration of the rights of the creditors.

Thetrustee argues that the tax clause has the effect of an after-acquired property clause in a general security agreement and the Crown isbound to provide the refunds to the trustee notwithstanding the restoration of rights of the creditors. In effect, the trustee argues that theOrder overrides the statutory right of set-off in the Income Tax Act. Further, the trustee cites Coopers & Lybrand Limited as a generalprohibition against setting-off a post-bankruptcy credit against a pre-bankruptcy debit. ii) The Crown [19] The Crown argues the tax clause cannot have the effect described by the trustee.

First, they argue that the discharge of thetrustee on April 17, 2018 restores the Crown’s rights, citing s 69.3(1) and (1.1) which provide: Stays of proceedings — bankruptcies 69.3

(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedyagainst the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery ofa claim provable in bankruptcy. End of stay (1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged. [20] The Minister complied with the Order prior to the discharge of the trustee, providing a post-assignment credit of $117.47 anda further post-assignment credit of $5,395.77, as noted above.

The refunds now in issue, though they may have included refunds for thepost-bankruptcy taxation years between 2011 and 2018, were not actually earned, created, or due until the post-bankruptcy returns werefiled in 2021 and 2022 for the 2014 – 2021 taxation years. [21] It is not controversial that pre and post-bankruptcy income tax refunds in the year of assignment are property of the bankruptpursuant to s 67 of the BIA. Beyond that, income tax refunds are ‘income‘, caught by s 68(2)(

a) which provides: 68(2) The following

definitions apply in this section. total income (

a) includes, despite paragraphs 67(1)(

b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned orreceived by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, including those received asdamages for wrongful dismissal, received as a pay equity settlement or received under

an Act of Parliament, or of the legislature of aprovince, that relates to workers’ compensation; [22] The effect of Re Chomistek, (per Robertson

R) and later, Re Turcotte, (per Thompson

R) show us that these tax refundsremain income. The bankrupt is obliged to account for that portion ‘earned‘ during the bankruptcy, prior to discharge, plus the amountsreceived by the CRA on account of the calendar year of the bankruptcy pursuant to s 67(1)(c) (Turcotte at para 14 and see Marzetti vMarzetti). Despite the trustee’s discharge in 2018, the bankrupt has not been discharged. Section 68(2)(

a) catches, as income, all of therefunds in question. [23] The crux of the issue is the

interpretation of the tax clause. The trustee argues that the tax clause acts as a s 68(13) order,which would permit the trustee to claim against a creditor of the bankrupt, if the bankrupt does not remit or account for the amount setby the Order, to the extent of the bankrupt’s obligation to the estate if the bankrupt fails to do so.

Funds paid under a s 68(13) order comedirectly into the estate without further order. (I note that some tax clauses are drafted this way – though not here.) [24] The Crown argues that the Order is not competent to bind the Crown, especially now that the trustee has been discharged.They say that there are only four federal statutory exceptions to the common law rule: (a) Section 67(1)(

c) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”); (

b) Part II of the Family Orders and Agreements Enforcement Assistance Act, R.S.C. 1985, c.4 (2nd Supp.) (“FOAEAA”); (

c) The Garnishment, Attachment and Pension Diversion Act, R.S.C. 1985, c G-2, (“GAPDA”), and (

d) The Tax Rebate Discounting Act, R.S.C. 1985, c. T-3 (“TRDA”). [25] A claim against the Crown is not assignable: Eastern Trust at page 403, citing Chipman v The King, (CAEXC), [1934] Ex CR 152 and Mitchell at paragraphs 54 and 55. An exception is where the Crown voluntarily complies, as it did with the2013 taxation year refunds, prior to the trustee’s discharge. [26] The Crown further cites s 67 of the Financial Administration Act: General prohibition 67 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. and

Section 29 of the Crown Liability and Proceedings Act : No execution against Crown 29 No execution shall issue on a judgment against the Crown. saying that the foregoing provisions prohibit assignment of any liability owed to them by the Crown, that a purported assignment does not bind the Crown and that it prohibits the Court from issuing execution against the Crown. [ 27 ] As noted, the trustee’s answer is that the tax clause in the Compelling Order is a binding order of the Court, made by a court of competent jurisdiction, with notice, (and not appealed) in proceedings under an Act of Parliament that binds the Crown.

Denouement [ 28 ] Happily, it is unnecessary to resolve these larger issues. [ 29 ] The tax clause in question does not operate as a s 68 (13) order would in other circumstances. First of all, it does not name an amount. In this case, all the tax clause purports to do is to intercept the refunds subject to further order of the Court. It is a two step process. Step one relieves the CRA from an obligation to pay refunds only to the taxpayer. The refunds do not go directly into the estate as they might purport to do in other versions of the tax cluse.

A further order of the Court is necessary, and it would have to take into account the bankrupt’s obligations to the estate (in the sense that the refund might represent an overpayment) and the rights of the parties. It is discretionary and not a fait accompli . [ 30 ] The rights and responsibilities of the parties are affected by the discharge of the trustee and the effect of s 69.3(1.1).

I do not read the first part of the clause ‘notwithstanding the discharge of the trustee’ as overriding this subsection. [ 31 ] A trustee is free to obtain her discharge in circumstances described by the Compelling Order (or, in other cases, before the bankrupt is discharged, for the failure to comply with a Conditional Order, or an indefinite adjournment of an application for a bankruptcy discharge). The trustee will also apply to be discharged at the end of the bankruptcy, after the bankrupt is discharged, the FSRD is taxed and the accounts cleared. [ 32 ] The two discharges are not the same.

In the former situation, the trustee is discharged, but its obligations are neither extinguished nor released. In Decker (at para 28 ) the Court of Appeal finds: ... The removal of the stay exposes the bankrupt to further proceedings, but the bankrupt continues in bankruptcy and the administration of the bankrupt’s estate continues to be governed by the Act.

This is demonstrated by section 41(10), which provides that “notwithstanding his discharge, the trustee remains the trustee of the estate for the performance of such duties as may be incidental to the full administration of the estate.”... [ 33 ] The tax clause reminds us of this. It means that the trustee remains the receptacle for the tax refunds and is the proper payee rather than the bankrupt; potentially intercepting them to the extent of the bankrupt’s obligations to the estate. The trustee does not wholly exit the stage on an interim discharge.

The words ‘notwithstanding the discharge of the trustee’ are simply a reminder of the effect of s 41(10) and cannot be read (without more) as overriding s 69.3(1.1). There is no reason to read these words as putting the CRA in a different, disadvantaged position from all of the other creditors following a trustee’s interim discharge. [ 34 ] Even then, s 68(13) could not capture the full amount of the refunds, beyond the bankrupt’s remaining obligations to the estate.

The tax clause cannot be read so widely. [ 35 ] When the creditor’s rights are restored as a consequence of the lifting of the stay, it usually means that a creditor can resume or initiate proceedings for the very amounts proved in the bankruptcy. What the Crown asks is essentially no more than the right to combine and settle that a bank might have, setting off proved claims against post-bankruptcy credits; so long as the right otherwise exists. Otherwise, s 69.3(1.1) would have little meaning or consequences. [ 36 ] I do not see that the Court would direct otherwise.

The latter part of the tax clause requires consideration of the rights and obligations of the parties and a direction. The funds do not automatically go into the estate. [ 37 ] It is my opinion that the discharge of the trustee restores the right of the Crown to use its set-off powers in s 164(2) of the Income Tax Act to set-off the post-bankruptcy credits against the pre-bankruptcy debt proved by the Crown. Disposition [ 38 ] The trustee’s application is refused.

The Crown may retain the funds and set them off against the bankrupt’s tax debt. [ 39 ] I am grateful to counsel for their thorough and very helpful submissions. Heard on the 15 th day of March, 2023. Written Submissions March 21, 2023 and April 4, 2023. Dated at the City of Edmonton, Alberta this 15th day of August, 2023.

W.S. Schlosser Registrar in Bankruptcy Appearances: Bryan P Maruyama Parlee McLaws LLP for the Trustee Dan Faber Faber Inc Trustee George F Bódy Department of Justice Canada for the Attorney General of Canada on behalf of the Canada Revenue Agency