Repayment of Retail Tax and Bankruptcy

Repayment of Retail Tax and Bankruptcy

Businesses that sell goods or provide services in Canada are obliged to collect sales tax on most items sold. Depending on which province or territory business is carried out in it may also be necessary to pay taxes there. In 2010, the harmonized sales tax was introduced and replaced the provincial sales tax and the goods and services tax in the participating provinces. Some provinces, Quebec is one example, require that all out-of-province vendors who sell goods and services to residents of Quebec register to collect Quebec sales tax prior to the sale of goods or rendering of services.

Late payments or failure to pay retail tax may result in penalties and interest. Providing incorrect information is also penalized with interest. In a bankruptcy, outstanding retail tax is a debt provable and as such it will normally be discharged. R. v. Manzioros is a case that deals with bankruptcy and repayment of retail tax.
E Manzioros (Debtor) operated a full service hotel and motel property in Manitoba. During the time of his operation of the establishment, the Debtor remitted some but not all of the retail sales tax required under the Retail Sales Act of Manitoba (RSA). In 2001, the Debtor was charged under the RSA with failure to remit taxes in the sum of CAD 20,000.

At the same time the Debtor contacted a Licensed Insolvency Trustee for assistance with his financial difficulties. A Licensed Insolvency Trustee is a debt management professional licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer and supervise consumer proposals and bankruptcies and to ensure that these processes comply with all aspects of the Bankruptcy and Insolvency Act (BIA). After reviewing the Debtor’s financial situation the Licensed Insolvency Trustee proposed that he should make an assignment into bankruptcy which he duly did.

At the hearing in court with respect to the unpaid retail tax the Debtor pleaded guilty to this charge, which means that he would incur a mandatory order of payment of any unpaid tax including arrears, interest and penalties. However, the court did not grant the mandatory order and the reason was that the Debtor had received an absolute discharge from bankruptcy. This decision was appealed by Revenue Canada and, consequently, the matter to be dealt with by the appellate court was the relationship between the BIA and the RSA.

The appellate court started with concluding that the BIA is valid federal law and that the federal government has exercised its jurisdiction in the domain of bankruptcy. The RSA is valid provincial legislation. When the assignment into bankruptcy was made a conflict arose between these two statutes with the result that the RSA becomes inoperative to the extent it conflicts with the BIA. In conclusion, the trial court was thus correct in not ordering the payment of unpaid taxes.

For further questions relating to payment of taxes, consumer proposals and bankruptcy contact a licensed Licensed Insolvency Trustee for a free initial consultation.