Updated: December 23, 2024
Issue
The Office of the Superintendent of Bankruptcy (OSB) received several requests for clarification regarding the treatment of the Canada Carbon Rebate (CCR or rebate) in an insolvency proceeding following the publication of its previous position on January 27, 2023. The general nature of the CCR and the mode of payment of the rebate to all eligible Canadian residents in eight provinces will impact the administration of many estates and clarification by the OSB is intended to ensure consistency.
Position
Regardless of when the rebate is received, the CCR is property of the bankrupt under paragraph 67(1)(c) of the Bankruptcy and Insolvency Act (BIA) when the base tax return year on which it is calculated (namely, the taxation year in respect of which the tax refund is owed) is the calendar year of the bankruptcy or a prior year.
Although the amount paid is based on the number of members in the family unit, the entire amount vests with the Licensed Insolvency Trustee (LIT) as property of the bankrupt.
Any CCR calculated based upon a taxation year that is after the year of the bankruptcy is to be included in the calculation of surplus income payments under section 68 of the BIA, if applicable, and if the bankrupt is not already discharged.
As outlined below, LITs may have to wait to close some estates in order to receive and distribute the full amount of the CCR to creditors.
Context
Prior to 2021, the CCR, formerly known as the Climate action incentive payment (CAIP), was a refundable tax credit claimed annually on personal income tax returns. Since July 2022, the CCR is paid quarterly to eligible residents of Alberta, Saskatchewan, Manitoba and Ontario. This rebate has also been paid to eligible residents of Newfoundland and Labrador, Nova Scotia and Prince Edward Island since July 2023, and to eligible New Brunswick residents since October 2023 (retroactive to July 2023). Note that while the list of provinces from which eligible residents will receive the rebate may change from time to time, the treatment in insolvency of the CCR remains the same.
Analysis
The Income Tax Act (ITA) was modified in 2018 following the introduction of new regulations to the Greenhouse Gas Pollution Pricing Act.
According to section 122.8 of the ITA, the CCR is deemed to be an overpayment by an eligible individual on account of their tax payable made on a specified month for a taxation year:
122.8(4) An eligible individual in relation to a month specified for a taxation year who files a return of income for the taxation year is deemed to have paid, during the specified month, on account of their tax payable under [the ITA] for the taxation year, [the determined] amount.
Since income tax payable can only be derived from revenue generated during the year, any amount claimed as a CCR is considered to be an overpayment of income tax by the individual.
The term "month specified" used in section 122.8 of the ITA is defined in subsection 122.8(4.2) of the ITA and means that the rebates in respect of a taxation year are paid in April, July and October of the following year and January of the year after that.
Paragraph 67(1)(c) of the BIA states that the property of the bankrupt includes
[…] any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year […] in which the bankrupt became a bankrupt except the portion that
- is not subject to the operation of this Act, or
- in the case of a bankrupt who is the judgment debtor named in a garnishee summons served on His Majesty under the Family Orders and Agreements Enforcement Assistance Act, is garnishable money that is payable to the bankrupt and is to be paid under the garnishee summons […]
The CCR is a refund owed under the ITA and does not fall under one of the two exceptions listed in paragraph 67(1)(c) of the BIA. Nothing in the BIA or other federal or provincial legislation excludes this type of rebate from the operation of the BIA. Therefore, when calculated based on the tax return for the calendar year in which a person became a bankrupt or on the tax return for prior years, these rebates are considered property of the bankrupt divisible among the bankrupt's creditors regardless of the year in which the money is received, as it is linked to the year of the base tax return used for the calculation.
Although the amount paid is based on the number of members in the family unit, it is not made to the bankrupt in trust for other members of the family unit. Consequently, the entire amount falls under paragraph 67(1)(c) of the BIA.
As paragraph 67(1)(c) of the BIA does not apply to refunds owing to the bankrupt under the ITA in respect of calendar years following the year of bankruptcy (payments calculated based on tax returns for subsequent years), the CCR calculated upon the tax return for subsequent years should be considered as income per section 68 of the BIA and included in the calculation of surplus income, if applicable and the bankrupt is not already discharged by the time the rebate is received.
The following examples illustrate the treatment under the BIA of the CCR for different scenarios.
Example 1
An eligible individual made an assignment and became bankrupt in December 2023. The individual is a first-time bankrupt required to make surplus income payments to the estate under section 68 of the BIA and is automatically discharged in September 2025.
|
Date CCR received |
Taxation Year |
Treatment |
Rationale |
|
January 2024 |
2022 |
Property of the bankrupt divisible among their creditors |
The rebate is owed in respect of a year prior to the year of bankruptcy and is property under paragraph 67(1)(c) of the BIA. |
|
April, July and October 2024 and January 2025 |
2023 |
Property of the bankrupt divisible among their creditors |
The rebates are owed in respect of the year of bankruptcy and are property under paragraph 67(1)(c) of the BIA. |
|
April 2025 and until discharge |
2024 |
Income per section 68 of the BIA and included in the calculation of surplus income |
These subsequent rebates are owed in respect of the year after the year of bankruptcy. When they are received between the date of the bankruptcy and the date of the bankrupt's discharge, they are not property but are to be included in the "total income" under subsection 68(2) of the BIA. |
| October 2025 and after | 2024 | The rebates are paid to the individual | The rebates are both earned and received after the date of the bankrupt’s discharge. |
Example 2
An eligible individual made an assignment and became bankrupt in January 2024. The individual is a first-time bankrupt without surplus income and is automatically discharged in October 2024.
| Date CCR received | Taxation Year | Treatment | Rationale |
|
January 2024 |
2022 |
Property of the bankrupt divisible among their creditors |
The rebate is owed in respect of a year prior to the year of bankruptcy and is property under paragraph 67(1)(c) of the BIA. |
|
April, July and October 2024 and January 2025 |
2023 |
Property of the bankrupt divisible among their creditors |
The rebates are owed in respect of a year prior to the year of bankruptcy and are property under paragraph 67(1)(c) of the BIA. |
|
April, July and October 2025 and January 2026 |
2024 |
Property of the bankrupt divisible among their creditors |
The rebates are owed in respect of the year of bankruptcy and are property under paragraph 67(1)(c) of the BIA. |
|
April 2026 and after |
2025 |
The rebates are paid to the individual |
These subsequent rebates are owed in respect of the year after the year of bankruptcy and are both earned and received after the date of the bankrupt’s discharge. |