Offsets of Amounts Payable When a Bankruptcy Has Occurred
Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.
GST/HST Policy Statement P-162
Date of Issue
December 15, 1994
Offsets of amounts payable against amounts owing when a bankruptcy has occurred.
Section 318 of the Excise Tax Act, Provisions under the Bankruptcy and Insolvency Act.
National Coding System File Number(s)
January 1, 1991.
Issue and Decision
In what situations, if any, should the refunds or rebate amounts be paid to the trustee for the estate of the bankrupt and, in what situations, if any, should the Minister exercise the discretion under s. 318 of the Excise Tax Act to require that such amounts be offset against amounts owing?
The concept of mutuality is central to any discussion of offsets in bankruptcy situations. Mutuality requires among other things, that the respective debts must be between two parties in their same capacities. Since under the Bankruptcy and Insolvency Act,pre-bankruptcy debts are the liability of the debtor, but amounts payable arising post bankruptcy are payable to the trustee, there is no mutuality between pre and post bankruptcy debts.
Amounts payable which relate to pre-bankruptcy periods will therefore only be used to offset pre-bankruptcy amounts owing. Post bankruptcy amounts payable will only be used to offset post bankruptcy amounts owing. Subject to the application of subsection 225(6) of the Excise Tax Act, each period will be kept distinct and amounts relating to one period will not be affected by amounts or activity relating to a different period. In a similar fashion, section 263.1 places restrictions on the claiming of rebates when bankruptcy has occurred.
Where bankruptcy has occurred on a certain date:
Pre - Bankruptcy
1. If there are no amounts outstanding pre-bankruptcy and all returns have been filed as required, the Department will pay the amount of the approved rebate or refund to the estate of the bankrupt.
2. If a registrant has a pre-bankruptcy amount outstanding on its account, the Department will use any amounts payable that relate to the pre-bankruptcy period to offset those outstanding pre-bankruptcy amounts. These pre-bankruptcy amounts payable will not be used to offset any post-bankruptcy amounts owing on the account.
3. After offsetting all amounts outstanding on an account in the pre-bankruptcy period with amounts payable by the Minister, any excess amounts payable which still remain will be paid to the estate of the bankrupt. However, if there are other pre-bankruptcy amounts due to the Crown, the excess funds will be available for offset against those liabilities, prior to being paid to the estate.
Post - Bankruptcy
4. If there are no amounts outstanding post-bankruptcy and all returns have been filed as required, the Department will pay the amount of the approved rebate or refund arising post-bankruptcy to the estate of the bankrupt.
5. If a registrant has a post-bankruptcy amount outstanding on its account, the Department will use any amounts payable that relate to the post-bankruptcy period to offset outstanding post-bankruptcy amounts. Post-bankruptcy amounts payable will not be used to offset any outstanding pre-bankruptcy amounts.
6. Subsection 225(6) of the Excise Tax Act, restricts trustees from claiming ITCs that arose in the pre-bankruptcy period in any post-bankruptcy period returns unless all pre-bankruptcy amounts outstanding have been paid or remitted.
After offsetting all amounts outstanding on an account in the post-bankruptcy period with amounts payable by the Minister, any excess amounts payable which still remain will be paid to the estate of the bankrupt.
However, should there be other Crown debts outstanding, any monies remaining after the GST debt is satisfied according to the policy above, will be available to pay down those other Crown debts, prior to disbursement to the estate of the bankrupt.
A registrant becomes bankrupt on January 15, 1993. Amounts owing on the registrant's account as of January 15, 1993, total $14,000. Two returns which relate to the pre-bankruptcy period have not been filed and are overdue.
The trustee in bankruptcy files the two overdue pre-bankruptcy returns and the return that relates to the reporting period ending January 15, 1993. Amounts shown on the returns are as follows:
Return 1 - Net Tax $-12,000
Return 2 - Net Tax $ 3,000
Return 3 - Net Tax $ 100
The next return filed by the trustee relates to the post-bankruptcy period when the trustee is administering the estate of the bankrupt. It reports a net tax amount of $-2,000 and a refund of that amount is requested.
Section 318 would apply to this situation as follows:
The net tax refund of $12,000 in the pre-bankruptcy period would be used to offset $12,000 of the $14,000 outstanding amount, leaving an amount outstanding of $2,000. Added to that $2,000 would be the positive net tax amounts in the remaining two returns of $3,000 and $100. The total pre-bankruptcy amount outstanding now totals $5,100.
Since there are no outstanding amounts in the post-bankruptcy period and all preceding returns have been filed, the Minister would issue a refund to the estate of the bankrupt in the amount of the negative net tax ($2,000). Of
course, pursuant to ss. 225(6) of the ETA, it should first be determined whether the ITCs claimed post-bankruptcy relate to the pre-bankruptcy period. If such is the case, then the pre-bankruptcy ITCs should be denied post-bankruptcy.
Furthermore, prior to issuing any refund, that refund amount would be available for offset against any other Crown debt owed by the estate in the post-bankruptcy period.
A registrant who is a quarterly filer with a calendar year as a fiscal year becomes bankrupt on May 7, 1993. All returns have been filed and there are no amounts outstanding on the account. Subsequently, the trustee in bankruptcy files returns for two reporting periods in accordance with the filing requirements. The first return relating to the period April 1 - May 7, 1993, reports a negative net tax of $350. The second return for the period May 8 - June 30, 1993, reports a positive net tax of $400 but no remittance accompanies that return. Both returns are filed together on July 10, 1993.
The returns would be treated as follows for purposes s. 318:
Each return must be allocated to the correct period. Since the first return related to a pre-bankruptcy period, a s. 318 offset can only be performed against that return and any amounts outstanding in the pre-bankruptcy period. Since there are no amounts outstanding in the pre-bankruptcy period and all preceding returns had been filed, the trustee in bankruptcy would receive a net tax refund of $350 for the estate provided that there were no other outstanding Crown debts which required the retention or offset of that refund.
The second return relates to the post-bankruptcy period and would be posted as an amount owing on which penalty and interest accumulates. Any subsequent refund or rebate amounts which are requested in the post-bankruptcy period would then be used to offset the $400 amount outstanding plus applicable penalty and interest. Note that (with certain exceptions) the trustee is liable for the payment or remittance of amounts that became payable or remittable by the person during the period beginning the day after the trustee became the trustee in bankruptcy of the person and ending on the day the discharge of the trustee is granted under the Bankruptcy and Insolvency Act.
A registrant becomes bankrupt on October 19, 1993. Although the registrant had a calendar month filing frequency, no returns had been filed for the 1993 year.
After appointment, the trustee filed returns for the months of July, August, and September. Each of those returns was in refund position and claimed a total of $37,000 in net tax refunds.
At a later date, the trustee filed returns for the months January, 1993 through May, 1993. All of these returns reported positive net tax amounts.
The refund amount claimed of $37,000 will be treated as follows:
Since all returns had not been filed when the trustee filed the returns requesting a refund, the refund amount of $37,000 would be credited to the registrant's account but not paid out. When the missing returns are filed at a later date, the $37,000 credit will be used to offset any unremitted positive amounts of net tax, penalty and interest as required. When the missing returns for June and October 1 - 19 are filed, any excess credit amount would first be applied to any unremitted positive amount of net tax for June and the October 1 - 19 periods. Any remaining credit amount would first be available for retention or offset for any other Crown debts. Any amounts remaining after those offsets would then be paid to the estate of the bankrupt.
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