Indian Residential School Settlement Payments

December 7, 2006

In May, 2006 following an announcement in the Federal Budget, the Indian Residential Schools Agreement was entered into. The government website set up to provide information on this matter states that "the Settlement Agreement proposes a Common Experience Payment to be paid to all eligible former students who resided at recognized Indian Residential Schools, an Independent Assessment Process for claims of sexual and serious physical abuse, as well as measures to support healing, commemorative activities, and the establishment of a Truth and Reconciliation Commission."

The Agreement is in the process of being approved by Courts across Canada. Some advance payments may be made to former residents who are older than 65 years as at May 30, 2005.

The OSB has been asked to provide its views on whether the payments made under this Agreement constitute property of the bankrupt under s. 67 of the Bankruptcy and Insolvency Act (BIA), or, in the alternative, whether they are to be considered in light of s. 68.

The decision in Re Brodie [1969] 1 O.R. 285 sets out the law on this question. It confirms the principle in Re Hollister [1926] 3 D.L.R. 707 , which was a Supreme Court of Ontario decision by Fisher J. in which the trustee had applied for payment on behalf of and for the general benefit of creditors of monies that had been awarded to an undischarged bankrupt for personal injuries suffered in an automobile accident. The decision read, in part, that "The law is well settled that the Bankruptcy Act never intended to increase the assets of an insolvent for division amongst his creditors, by monies recovered in an action for personal injuries, as these monies are awarded as damages to the debtor for his pain, suffering and loss of comfort of life, to pay his physician, nurses and hospital expenses, and to compensate him whilst he is incapacitated from earning a living for himself and his family.....it is only actions which relate directly to the bankrupt's property and can be converted into assets for the payment of creditors that pass to the debtor's trustee. Cases of action arising from bodily or mental suffering, such as actions for assault, seduction, criminal conversation, and damages for personal injuries, remain in the bankrupt."

As was the case in Re Brodie, it is necessary to determine what portions of the settlement payments relate to pain and suffering, and which could arguably relate to property. The introductory clauses of the Settlement Agreement itself, as well as the information provided on the government website as "Frequently Asked Questions" provide guidance in this matter. (At this time there is no legislation enacted; should legislation be passed in the future, it will require examination to see if this matter has been dealt with there.) Both of these sources speak to the harms and abuses suffered by aboriginal children who were resident in those schools and the desire for a 'fair, comprehensive and lasting legacy,' and the 'promotion of healing, education, truth, reconciliation and commemoration.' There is no indication that the payments are connected in any way with 'property'. It is therefore concluded that these payments do not constitute property divisible amongst the creditors pursuant to s. 67 of the BIA.

As to whether the settlement payments can be treated as falling under s. 68 of the BIA, and form part of the surplus income calculations, it is concluded that these payments have no relation or connection to income earned by the debtor, given that they are by way of compensation for pain and suffering and are in the nature of a windfall.

In a decision of Justice Burrows regarding the 2005 Alberta Resource Rebate in Re Coates, 2006 ABQB 201, a receipt should not be included in the surplus income calculation where it "has nothing to do with the use of personal resources or some other asset, or where it is unrelated to personal maintenance expenses, or where it is a form of receipt that would not normally be used for covering recurring living expenses...." With these considerations in mind, it would be very difficult to conclude that the payments pursuant to the Settlement Agreement should be included in surplus income calculations.

Further, clause 18.01 of the Agreement provides that no amount payable under the Agreement can be assigned, and any such assignment is null and void except as expressly permitted by the Agreement. The government intends as well that these payments not affect social assistance , nor will they be subject to income tax.

It is therefore the position of the OSB that the payments made under the Settlement Agreement remain with the bankrupt, do not form property of the estate divisible amongst creditors, and are not income for the purposes of s. 68 of the BIA.

It is also acknowledged that this Agreement may be voluntarily entered into by qualifying individuals. Some others may choose to pursue their own separate legal actions. Any settlements resulting from such independent actions would need to be considered on their own merits to determine the nature of any compensation paid.

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