Treatment of the Ontario Sales Tax Transition Benefit under the Bankruptcy and Insolvency Act

Issue

The Office of the Superintendent of Bankruptcy (OSB) has been asked for its position regarding treatment of the Ontario Sales Tax Transition Benefit (OSTTB) under the Bankruptcy and Insolvency Act (BIA).

Background

Starting on , there will be a harmonized sales tax (HST) in the Province of Ontario. The 13 percent HST will combine the 5 percent federal goods and services tax (GST) and the 8 percent provincial sales tax (PST) into one tax that will be collected by the federal government.

There will be a transition period as businesses adjust prices to reflect their costs. Therefore, the OSTTB will provide temporary relief to residents of Ontario to help them adjust to the new harmonized sales tax system. The Government of Ontario will fund the program and the Canada Revenue Agency will administer the program through the personal income tax system.

Eligible Ontario tax filers will receive three tax-free payments scheduled for June 10, 2010, December 2010 and June 2011. The OSTTB is time limited and no benefit will be paid after April 30, 2013.

Analysis

The enacting provision can be found in the Ontario Taxation Act (OTA) at section 104.12. More specifically, subsections 104.12(6), (7) and (8) essentially deem an eligible individual to have made an overpayment on account of tax payable. As well, and for the purposes of the BIA, subsection 104.12(22) of the OTA states the following:

Amount not to be charged

104.12(22) Subsection 122.61(4) of the Federal Act applies for the purposes of this Part in respect of any overpayment deemed to arise under this section. 2009, c. 34, Sched. U, s. 25.

In turn, subsection 122.61(4) of the federal Income Tax Act (ITA) states the following:

122.61(4) A refund of an amount deemed by this section to be an overpayment on account of a person's liability under this Part for a taxation year

  • (a) shall not be subject to the operation of any law relating to bankruptcy or insolvency;
  • (b) cannot be assigned, charged, attached or given as security;
  • (c) does not qualify as a refund of tax for the purposes of the Tax Rebate Discounting Act;
  • (d) cannot be retained by way of deduction or set-off under the Financial Administration Act; and
  • (e) is not garnishable moneys for the purposes of the Family Orders and Agreements Enforcement Assistance Act.

Moreover, paragraph 67(1)(b.1) of the BIA states the following:

Property of the Bankrupt

67.(1) The property of a bankrupt divisible among his creditors shall not comprise

[…]

(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides;

Pursuant to paragraph 122.61(4)(a) of the ITA, a deemed overpayment in this part of the ITA is not subject to any bankruptcy or insolvency law, thereby excluding the application of the BIA in its entirety. Given that ss. 104.12(22) of the OTA makes subsection 122.61(4) of the ITA applicable to the OSTTB payment and that this amount is considered to be a deemed overpayment, the BIA does not apply to OSTTB payments.

Position

The OSB is of the view that the OSTTB should not be considered as property of the bankrupt under section 67 of the BIA or taken into account when calculating surplus income in accordance with section 68 of the BIA.

Please note that the OSB will be issuing a position paper in the near future regarding treatment of the Ontario Sales Tax Credit under the Bankruptcy and Insolvency Act.

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