BULLETIN on CRA by onetwothree4


									                                  CANADIAN ASSOCIATION                            ASSOCIATION CANADIENNE
                                  OF INSOLVENCY AND                               DES PROFESSIONNELS DE L’INSOLVABILITÉ
                                  RESTRUCTURING PROFESSIONALS                     ET DE LA RÉORGANISATION

BUL04-6                                                                                                        Octobe r 2004

                                         CRA IS WORKING WITH CAIRP

On September 8, 2004 CAIRP Chair Bill Courage, ITA Task Force Chair Mark Rosen and
CAIRP President Norm Kondo met with senior officials of CRA, representing both Policy and
Collections. Officials from Industry Canada Policy and the Office of the Superintendent of
Bankruptcy were also in attendance.

The meeting was characterized by a very frank and constructive exchange of views. Broadly
speaking, CRA’s views and the Association’s views are often in agreement. However, there
are some issues that must be resolved and the purpose of this Bulletin is to provide some
information and guidance to our members.

Policy and Proposals

Notwithstanding some public pronouncements, CRA’s policy has not changed. Its mandate
is to protect the Crown and maximize recovery. In a proposal, the starting point for
negotiation is that CRA wants repayment of 100% of tax plus penalties and interest. CRA
pointed out that all creditors start a collection process hoping for a full recovery, and that
they are no different in this regard. However, CRA will either reject or accept proposals
based on common sense and a practical assessment of what the debtor can pay.

The only exception to this policy is in the case of a strategic insolvency or the debtor has
been supporting an extravagant lifestyle and has made no attempt to meet his or her tax
obligations. In this case, CRA may opt for a more punitive route by bankrupting the debtor,
even if the proposal appears to be more favourable, and opposing the bankrupt’s discharge
to attempt to obtain a higher recovery.

Bankruptcy Specialist

CRA is creating a new position, Bankruptcy Specialist. These specialists will be highly
trained and will act as liaison and consultant for collectors in proposals. There will be at least
one specialist appointed per region. The agency hopes that this will also help to enhance
consistency in evaluation of proposals and will discourage or eliminate proposal shopping
among CRA offices.

277 Wellington Street W., Toronto, Ontario, M5V 3H2 (416) 204 -3242 Fax: (416) 204-3410 E-mail: info@cairp.ca Web site: www.cairp.ca
        Affiliated with The Canadian Institute of Chartered Accountants / Affilié à l ’Institut Canadien des Comptables Agréés
Deemed Trust Claims on After-acquired Property

The Agency takes the position that its deemed trust claim attaches to after-acquired
property and that property includes surplus income. Literal reading of the Income Tax Act
Deemed Trust Sections says that they operate notwithstanding any other act. This would
mean that the Agency could ignore the discharge granted under the Bankruptcy and
Insolvency Act to individual debtors and continue to collect its deemed trust claim after

CAIRP suggested that there should be a “line in the sand”, being the date of bankruptcy,
where the claims of property claimants were determinable, and that funds that came into the
hands of the trustee from the operation of the BIA should be available to all creditors. This
would create a level playing field.

CAIRP pointed out that in non-strategic bankruptcies, there was a conflict between the
Agency’s mandate to collect debts owing to it and Industry Canada’s policy of granting the
honest but unfortunate debtor a fresh start under the Bankruptcy and Insolvency Act. We
urged the officials from CRA/Finance and Industry Canada to resolve this potential policy
conflict rather than forcing individual trustees to deal with CRA’s deemed trust claims.
Historically, any court decisions on deemed trust claims that went against the Agency were
quickly dealt with by retroactive amendments to the Income Tax Act. We see trying to
resolve this issue in court as futile and a poor use of the Association’s resources. CAIRP will
intervene if required, but we are optimistic that the government departments will be able to
resolve the policy issue and to issue guidance to our members. CAIRP will be continuing to
monitor this discussion.

Deemed Security Interest Against Non-Exempt RRSP’s

CRA takes the position that its deemed security interest can attach to an RRSP. It would
register a certificate against a non-exempt RRSP. This is a position which requires further
discussion and exploration and Industry Canada will also sit in on these discussions, since it
is looking at the issue of fairness in treatment between pensions and RRSP’s in the context
of insolvency reform.

Social Insurance Numbers

The administrative difficulty is that CRA cannot identify a bankrupt without a SIN. OSB
cannot collect the SIN. This leads to delays or misdirection of refunds to trustees and
bankrupts. We suggested that the Insolvency Practice Committee look at solutions to this

In the meantime, members are encouraged to file “DC905” forms in order to facilitate the
prompt filing of claims by CRA, and the timely remittance of tax refunds to trustees.

Provisional Claims CAIRP’s Standard 03-1

Generally speaking, the participants thought that the Standard was working well. It is also
recognized that the Standard is only a stopgap measure until the Income Tax Act is
amended to provide for a deemed year-end in a proposal. Some collectors are asking for all
of the required clauses from the Standard to be included in the proposal, the reason being
that the collector wants to have some comfort that the proponent is aware of and

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understands the clauses. It was agreed that the proposal could simply refer to the fact that
the terms were in accordance with the Standard and that the consequences of failing to
comply were the same.

Deemed Trust Claim Letter

The Agency provided a copy of its model claim letter demanding payment for deductions at
source in a proposal. Notwithstanding the exclusive language of the letter, the Agency has
not changed its policy to negotiate the six-month time period for payment of these amounts.
The time period is negotiable. A copy of the letter is attached on the reverse side of this

National Liaison Group

CRA, CAIRP and the OSB are appointing representatives to a national liaison group. The
purpose of this group will be to keep the lines of communication open and to discuss the
problems and to find solutions for them. We are extremely pleased to participate in this
committee and compliment CRA on its willingness to deal with issues in this matter. We will
be advising you of topics under discussion by the committee, and request that you forward
concerns to the CAIRP office for inclusion on the committee’s agenda.

Directive 12R

The Office of the Superintendent of Bankruptcy is reviewing all pre 1992 directives. CRA
has suggested that as a result in legislative changes, and desired changes in how the policy
is administered, some amendment to Directive 12R may be necessary. In addition, it is likely
that this will become an Information Circular rather than a Directive because the document is
not the OSB’s position. It is an accommodation that is agreed to by CRA. Directives are
issued by the Superintendent and have the force of law. Directives must be supported by
the legislation, (BIA) and are intended to add clarity in the application of the Act.

Other Matters

Nationally, we are working constructively and cooperatively with CRA, and the Agency with
us. However, there are isolated cases of actions by trustees that undermine this
relationship. CRA raised the example of a trustee who was disallowing claims solely for the
purpose of keeping CRA from voting on proposals - the most notable case being where
CRA represented 85% of the debt.

On the other hand, some collectors are insisting on numerous clauses being included in
proposals, including the fact that lotteries and inheritances must be provided to the
administrator. Our view was that a proposal is a contract with creditors and that the debtor
wants certainty in the agreement. In a bankruptcy an inheritance or lottery winnings would
become part of the estate, in our view, it should not be included in a proposal.

CRA will be posting its policies on its web site so that they are clear and available to the
public and stakeholders. This will also provide a ready reference for Trustees and collectors
when discussing proposals.

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