Canadian Tax Haiku of the Week:
Bankruptcy is not
The way to avoid tax due
But sometimes last choice
Case comment on Fiddler (Re), 2014 SKQB 231
Last week we mentioned how there were very few ways to avoid paying the Canada Revenue Agency (“CRA”) when a tax debt is owed and all dispute procedures are exhausted. However, the Fidler case illustrates one way to get out from under; bankruptcy. However, we would not recommend it as it obviously isn’t a pleasant experience and therefore should be a last resort. In this case, Mr. Fiddler made an application for bankruptcy, his second. Essentially, Mr. Fiddler sought to have 14 years of income tax and withholding debt written off. Adding this amount to Mr. Fiddler’s previous write-offs, his total discharged debt would amount to approximately $662,000.00.
The Saskatchewan Queen’s Bench (“SKQB”) was tasked with determining the appropriate disposition of this bankruptcy discharge application in view of Mr. Fiddler’s unique circumstances.
Mr. Fiddler clearly hated paying taxes. He was absolutely discharged from his first bankruptcy, resulting in the CRA writing-off Mr. Fiddler’s entire income tax debt of $253,113.86 for the 1996-2000 taxation years. Previously, the CRA had forgiven Mr. Fiddler’s tax debt of $112,140.00 for the 1985-1988 taxation years.
Mr. Fiddler applied to the SKQB to be discharged from his second bankruptcy. Mr. Fiddler’s income tax debt was for $297,000.86 for the 2002-2009 taxation years. There were also claims proven for $70,127.32 in unremitted GST and $123,847.78 in unremitted source deductions. Like I said, Mr. Fiddler did not like paying taxes, and clearly was a repeat offender.
Mr. Fiddler, 70, has suffered serious health problems and is unable to work. He is reliant on Old Age Security, Canada Pension Plan and his children’s assistance to get by. As a result, the SKQB was satisfied that Mr. Fiddler did not have any surplus income.
Position of the Parties
The Minister of National Revenue (“Minister”) opposed Mr. Fiddler’s discharge application on grounds that Mr. Fiddler’s persistent failure to comply with his tax filing and payment obligations must be deterred to protect the integrity of the Canadian tax and bankruptcy systems. The Minister argued that Mr. Fiddler was the very definition of a tax-avoiding bankrupt who should be dealt with harshly by the court.
Mr. Fiddler did not deny his significant history of non-compliance with tax and bankruptcy obligations. Rather, he argued that in light of his situation (his limited income combined with his age and health problems), an order for $10,000.00 would be more appropriate.
The Bankruptcy and Insolvency Act (“BIA”) is designed to provide the “honest but unfortunate” debtor with relief from the crushing burden of debts by offering rehabilitation and the opportunity to be re-established as a contributing member of society.
The BIA is lenient in its treatment of a first time bankrupt individual (“bankrupt”). Generally, the bankrupt is discharged without a hearing after the passage of nine months, unless there is evidence of inappropriate conduct or noncompliance. However, when the bankrupt enters their second bankruptcy, or owes a significant tax debt, the BIA sets out more strict consequences.
If the personal income tax debt is $200,000.00 or more, and it represents 75% or more of proven unsecured claims in the bankruptcy, automatic discharge from bankruptcy is not available and the discharge is only available through a court order. Although Mr. Fiddler’s tax debt was high, this was not a s.172.1 tax bankruptcy because the income tax proportion of the total proven unsecured claims was less than 75%.
In situations where the bankrupt individual’s public debt is not personal income tax debt, but is high and comprises a significant portion of the proven claims in the bankruptcy (i.e., source deduction or GST debt), the courts generally order more serious consequences to deter non-compliance with taxing provisions.
Second-time tax-driven bankruptcy cases
The courts have treated personal income tax different from other forms of debt and consider bankrupt individuals with high tax debt to have committed “misconduct”. The courts have taken a stronger view against a second bankruptcy assignment to discharge high tax debt, calling it “unacceptable and an affront” to those who pay taxes. Accordingly, the driving consideration in cases involving high tax debt is deterrence, not rehabilitation.
As with all bankruptcy discharge dispositions, there are two key considerations concerning the bankrupt’s circumstances: the bankrupt’s honesty and the bankrupt’s means. A bankrupt’s means are assessed by considering whether the bankrupt presently has the ability to contribute towards a conditional order.
In a tax-driven bankruptcy, a bankrupt’s honesty is measured by considering whether: a) the bankruptcy was a result of an accident or whether there was persistent ignoring of the tax obligations; b) the purpose of bankruptcy was to escape the tax obligation; c) the bankrupt has continued to ignore tax obligations and other obligations since bankruptcy; and d) the bankrupt was maintaining a high standard of living at the expense of his creditors.
The court considers the degree of a bankrupt’s dishonesty in determining whether the discharge application ought to be granted, adjourned, suspended, granted with conditions, or refused. Applications for discharge were refused in Berenbaum and Wehner because there was evidence that the bankrupts had assigned in bankruptcy for reasons contrary to the above criteria. In Cook and Wehner, the matter was adjourned after the first hearing to give the bankrupt an opportunity to demonstrate that he was rehabilitated. The court in Cook acknowledged the need to send a strong message of deterrence while also ensuring the order was affordable.
The bankrupt’s age is generally factored into the disposition. Courts are more inclined to order more severe penalties in cases where a younger bankrupt demonstrates non‑compliance. This may have to do with the need to send a strong message of specific deterrence to younger bankrupts, but it also has to do with the need to consider the bankrupt’s potential to continue making payments over time.
If a bankrupt assigns in bankruptcy a third time, then the bankrupt’s circumstances (including age, family situation and ability to pay) become less relevant and the court’s emphasis shifts towards maintaining the integrity of the bankruptcy system.
The SKQB concluded that Mr. Fiddler should be required to make a payment of $40,000.00 to the bankruptcy estate.  Mr. Fiddler’s age of 70 years, diminishing health, potential to earn income, and the potential value of his land were all considered.
The SKQB stated that “to discharge the bankruptcy debts under these circumstances without an order for payment would be an affront to the integrity of the bankruptcy system and the tax system.” However, for 30 years Mr. Fiddler has persistently ignored his tax debt obligations and benefited from GST and employee payroll deductions that he collected and failed to remit. His “punishment” for such actions was a CRA write-off and first bankruptcy. Further, Mr. Fiddler continued to act in a non-compliant manner during his second bankruptcy.
It is clear that Mr. Fiddler has utilized the bankruptcy system as a clearing house to avoid his income tax obligations. Frankly, given the amounts of tax that he collected as withholding but did not pay ($600k+), a more rigorous review of his financial circumstances might perhaps have discovered more resources than he appears to have. In my experience, people like this often have a box or three buried somewhere or a safe deposit boxes in their kids’ names full of cash. I have little doubt that the $40k he needs to pay to get out from under, which seems like a lot based on his position at trial, magically showed up within days of the ruling. So rather than being harsh, I think the court was perhaps excessively lenient in granting Mr. Fiddler a discharge at all!
We usually have more sympathy for taxpayers, particularly those who had something of a case but just did not deal with their issues in a timely manner. As in the Leroux case (http://dominiontaxlaw.com/cra-owes-a-duty-of-care-to-taxpayers/) we often see a combination of inappropriate reassessments, excessive penalties, daily compounded interest and overwhelmed procrastination by taxpayers leading to a tax-driven bankruptcy. In such cases, bankruptcy is really the only way for a taxpayer to clear an overwhelming tax debt and start over. Fiddler was not one of those cases.
by Jonathan N. Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law.
 Fiddler (Re), 2014 SKQB 231 [Fiddler].
 The debt he owes for unremitted GST and employee payroll deductions.
 Fiddler, supra note 1 at para 9.
 Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA].
 Grogan v. Garner, 498 US 279 (1991).
 Fiddler, supra note 1at para 14.
 BIA, supra note 4 at para 168.1(1)(a).
 Ibid at para 168.1(1)(b).
 Ibid at ss. 172.1(1).
 Fiddler, supra note 1at para 18.
 BIA, supra note 4 at ss. 67(3).
 First Vancouver Finance v. M.N.R., 2002 SCC 49.
 Trueman, Re, 2001 ABQB 377 at para 7 [Trueman].
 Ibid at paras 15-16.
 Matter of the Bankruptcy of Aaron John William Cook, Court No. 17088 (Saskatchewan, unreported, July 26, 2011) at para 9 [Cook].
 Pinc Re, 2007 BCSC 380.
 2011 ONSC 72.
 16 C.B.R. (4th) 316 [Wehner].
 Jolin (Re), 2008 48138 (ON SC) [Jolin].
 Fiddler, supra note 1 at para 30.
 Doucet Re, 2007 NBQB 408 [Doucet].
 Fiddler, supra note 1 at para 31.
 Ibid at 34.
 Ibid at 32.