12 July 2005 External T.I. 2004-0092961E5 - Personal credits in different provinces-Bankruptcy

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the calculation of provincial non-refundable tax credits (referred to in the provincial equivalent to paragraph 118.95(b) of the Federal Act) for the post-bankruptcy period should be reduced by the amount claimed in another province for the pre-bankruptcy period, where the individual resides in different provinces in both periods.

Position: No.

Reasons: Where an individual becomes a bankrupt in a calendar year and resides in different provinces at the end of each taxation year ending in that calendar year, the individual can claim a portion of these credits allowed in the province of residence at the end of each taxation year as can reasonably be considered applicable to that taxation year. In our view, that portion must be calculated on a pro-rata basis, based on the number of days in the period for which the applicable pre-bankruptcy or post-bankruptcy return is filed.

XXXXXXXXXX 2004-009296

P. Massicotte, CA, M.Fisc.

July 12, 2005

Dear XXXXXXXXXX:

Re: Non-Refundable Tax Credits in Year of Bankruptcy

We are writing in reply to your enquiry of August 27, 2004, requesting our comments in connection with the calculation of certain provincial non-refundable tax credits in the year an individual becomes a bankrupt. Specifically, you are concerned about the situation where the bankrupt individual moves from one province in the pre-bankruptcy period to another province in the post-bankruptcy period. You mention that you have been advised that in the latter situation amounts (such as the basic personal amount) available in the province of residence on December 31st should be reduced by the amounts used on the pre-bankruptcy return of the former province of residence, in order to determine the amount allowed for the post-bankruptcy period.

You submit the hypothetical situation of an individual who resides in Alberta and declares bankruptcy on July 26, 2003. He subsequently moves to Manitoba and resides there on December 31, 2003. The individual would claim a basic personal amount of $7,633.29 (i.e. $13,525 x 206/365 days) on line 5804 of Form AB428 for the pre-bankruptcy period in Alberta. You indicate that upon filing the post-bankruptcy return in Manitoba, the basic personal amount allowed would be $7,634 (line 5804 on the MB428) less any amount claimed on the pre-bankruptcy return in Alberta (line 5804 of the AB428), resulting in an amount of $0.71 allowed for the post-bankruptcy period. Had the individual been resident of Manitoba at the time of bankruptcy (as well as on December 31, 2003), the basic personal amount allowed for the post-bankruptcy period would have been $3,325.50 (i.e. $7,634 - ($7,634 x 206/365)).

You ask us to confirm whether this is the appropriate method to apply in the above scenario as you feel it unfairly penalizes the bankrupt taxpayer because he or she would have reduced credits available to them on the post-bankruptcy return when they are responsible for any balance due.

Our Comments

Where an individual becomes a bankrupt in a calendar year, paragraph 128(2)(d) of the Income Tax Act (the "Federal Act") provides that the individual's taxation year is deemed to have ended on the day that is immediately prior to the day of bankruptcy (pre-bankruptcy period), and deems a new taxation year to have commenced on the day of bankruptcy (post-bankruptcy period). Accordingly, a bankrupt individual will have two taxation years ending in the same calendar year, with the first being from January 1 until the day immediately before the individual became a bankrupt, and the second taxation year from the date of bankruptcy to December 31st of that calendar year. Provincial legislation generally incorporates the same rules (see for instance section 4.15 of the Manitoba Income Tax Act and section 45 of the Alberta Personal Income Tax Act, which provide that subsection 128(2) of the Federal Act applies for purposes of those provincial acts).

When computing an individual's tax payable for a taxation year that ends in a calendar year in which the individual becomes bankrupt, section 118.95 of the Federal Act provides inter alia that the total of the amounts claimed in respect of non-refundable tax credits (such as the basic personal amount under section 118 of the Federal Act) for both the pre and post-bankruptcy periods cannot be greater than the amount that could have been claimed in respect of the calendar year had the individual not become bankrupt. In addition, pursuant to paragraph 118.95(b) of the Federal Act, only such part of certain tax credits (such as those described in section 118 of the Federal Act, other than subsection 118(3)) as can reasonably be considered applicable to the taxation year can be claimed by the individual for that year. Again, provincial legislation generally incorporates the same rules (see for instance paragraph 4.6(20)(q) of the Manitoba Income Tax Act and section 37 of the Alberta Personal Income Tax Act).

Based on the above provisions, it is our opinion that the method described above for computing the tax credits referred to in the provincial equivalent to paragraph 118.95(b) of the Federal Act (such as the basic personal amount, referred to in subparagraph 4.6(20)(q)(ii) of the Manitoba Act) is not appropriate. Where an individual becomes a bankrupt in a calendar year and resides in different provinces at the end of each taxation year ending in that calendar year, the individual can claim a portion of these credits allowed in the province of residence at the end of each taxation year as can reasonably be considered applicable to that taxation year. In our view, that portion must be calculated on a pro-rata basis, based on the number of days in the period for which the applicable pre-bankruptcy or post-bankruptcy return is filed.

In the hypothetical situation described above, the basic personal amount that should be allowed for the pre-bankruptcy period in Alberta should be $7,633.29 as computed above (i.e. $13,525 x 206/365 days). However, the amount that should be allowed for the post-bankruptcy period in Manitoba should be $3,325.50 (i.e. $7,634 x 159/365).

We have confirmed with our Assessment and Client Services Branch that the above method should be applied when computing the tax credits in the case where an individual resides in different provinces in both the pre-bankruptcy and post-bankruptcy periods.

We trust the above comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

CC Mr. Jack Szeszycki

Individual Returns and Payments Processing Directorate