Insights & Articles
Tax Driven Bankruptcy – Payment Conditions
In a decision released on December 15, 2015, the Supreme Court of British Columbia addressed a situation where a taxpayer made a second assignment in bankruptcy without having complied with the payment conditions imposed in his First Bankruptcy. The facts were fairly straight forward in the sense that Mr. Keylock sought protection under the bankruptcy rules after a failed real estate development project. Canada Revenue Agency (“CRA”) was a creditor in the First Bankruptcy which took place in 1994 (the “First Bankruptcy”). In May of 2000, Mr. Keylock received a Conditional Order of Discharge requiring him to pay $120,000 to the Trustee with minimum monthly payments of $2,500 until the principal sum was paid in full. In addition, Mr. Keylock was found guilty of 2 offences under the Bankruptcy and Insolvency Act (“BIA”), as a consequence of making false entries in his Statement of Affairs. He was also fined for those
Ultimately, Mr. Keylock did not comply with the terms of the Conditional Order and the First Bankruptcy was never completed. However, after negotiating with all of the creditors, Mr. Keylock was able to accomplish a discharge from the First Bankruptcy.
Following the First Bankruptcy, Mr. Keylock became successful in business and earned significant funds. However, ultimately, that real estate based business failed as well. At the time, and following a CRA audit, it was clear that Mr. Keylock was substantially indebted to CRA. The total unreported income was just under $1 million.
Mr. Keylock then made a formal Proposal to his creditors which was not accepted. The result of that was that Mr. Keylock was, once again, a bankrupt person under the BIA (the “Second Bankruptcy”). The Trustee was able to locate and sell certain assets resulting in more than $85,000 in recovery for the Trustee and creditors.
Ultimately, Mr. Keylock sought a discharge from the Second Bankruptcy. CRA opposed the granting of a discharge without a substantial payment condition.
The Court found that Mr. Keylock was responsible for his financial failings and also clearly responsible for failing to report income with CRA. The Court also found that he had not been fully rehabilitated through the Second Bankruptcy process as he continued to challenge his guilt for the previous bankruptcy related offences. He also blamed others for his financial problems and he made minimal efforts to obtain employment.
The Court recognized that at 58 years of age, Mr. Keylock did not have the advantage of a long working life ahead of him. Furthermore, there was no evidence that suggested that he was enjoying the lifestyle of a high income earner.
The Court ultimately ordered that he pay $100,000 and made a specific Order regarding the obligation to continue to file his tax returns.
The bottom line in these circumstances is that even Mr. Keylock, who is in the most difficult circumstances, will be allowed some measure of relief from circumstances that were created by himself. It is a great example of the fact that there is a reasonable remedy for virtually every situation, no matter how bad it seems.
Please contact Keith Trussler, Linda Smits or Ainsley Furlonger with your questions regarding these obligations and problem solving strategies.