Local bankruptcy lawyer Tim Hill says Canada Revenue Agency is taking a rare stand on a recent income tax debt case. And if the agency gets its way, it will make future cases difficult to resolve.
The case is built against Cape Breton construction manager Darrell Wilcox. According to information contained in the Statement of Affairs document, he owed the agency over $800,000 in tax. He also owed money on his credit card, which added up to over a million dollars of debt in total.
Wilcox, who owns the WICO Construction Management Ltd. in Sydney, chose to file a consumer proposal instead of declaring bankruptcy. It means his property didn’t get sold to pay for the debt. Instead, he paid his creditors in cash a certain percentage of the money he owed.
The proposal was accepted by his creditors, including Canada Revenue Agency, in December 2012. It was approved by the court a month later.
Tim Hill says Wilcox has paid off all the money agreed in the proposal in February. But the $450,000, which accounts for 40 per cent of his debt, hasn’t been distributed among the creditors yet because Canada Revenue Agency says the income tax liabilities weren’t filed on time, so they have to charge him interest and penalties for that.
However, the Bankruptcy and Insolvency Act doesn’t allow additional proceedings to be charged off of the proposed payment.
“But the income tax act says there can be interest. Because the case is being dealt in the bankruptcy court, the bankruptcy act should govern,” says Hill, “But the agency says the bankruptcy court doesn’t have jurisdiction over the matter of interest and penalties, and it should be settled at the tax court, which doesn’t make any sense.”
Hill expects the agency to file an appeal today. If it wins, the case will be brought to the Tax Court of Canada, and Wilcox will have to pay an additional $16,000 for late payment.
Hill says bankruptcy cases involving income tax debt is quite common in Nova Scotia, but only a few of such cases have interest and penalty issues, which makes Wilcox’s case important.
“I don’t expect the agency to win the appeal, but if they did, this case would set an example for similar cases in the future,” says Hill, “and it’s going to make it too expensive for people to go to two separate courts to sort things out – the bankruptcy part in the bankruptcy court and the tax part in the tax court.”
Bankruptcy court sees more tax debt cases
Hill says the ruling of the agency’s appeal will have an impact because more and more proposals are being filed at the bankruptcy court.
“There are new provisions in the bankruptcy act that upped the limit on the amount of money a proposal can settle,” says Hill, “so more rich business people are making these proposals, which invariably involve some income tax owed at the time.”
Late payment argument in Wilcox’s case
The trustee, who helped Wilcox prepare the proposal, says he submitted Wilcox’s $120,000 tax return to the agency in March 2013. And the money was sent to the agency’s office in Sydney well before the April 30th deadline. But the agency says it didn’t have records of receiving the money.
According to the Supreme Court of Nova Scotia’s documents, there’s no communication regarding the payment until six months later, when the agency called the trustee, asking for Wilcox’s 2012 tax return. At the same time, the agency decided to charge Wilcox $6,600 worth of interest and $9,600 in penalties due to the late payment.
The court bought the trustee’s testimony of filing the tax return before deadline, and ruled in Wilcox’s favor, saying the agency is not entitled to charge him any interest or penalties.
How did Wilcox’s tax debt add up?
According to Hill, Wilcox owed more than $411,000 of income tax over the course of three years before he had to file the consumer proposal. “The amount is quite large,” says Hill.
However, he says he can’t comment on how the tax debt piled up. Canada Revenue Agency’s Atlantic region office responded by email, saying according the tax act, they couldn’t discuss specific taxpayer’s information. Wilcox himself can’t be reached for comment either.
The documents from his trustee’s company, BDO Canada Limited, says he spent too much money and didn’t have the money to pay taxes.
Geoffrey Loomer, who teaches personal and corporation income taxation at Dalhousie University, says there are two scenarios. One is tax evasion – Wilcox didn’t file tax at all or filed it very late. “There are interests against late filing and it goes up everyday. So if you’re making a lot of money, the tax debt could add up quickly,” says Loomer.
He says another scenario is Wilcox unintentionally reported way less income than he should have. “The set of rules that apply to business people and employees is a lot different, and they make a huge difference on how much tax you pay,” says Loomer.
“I’ve seen cases where, a person runs a private corporation, and it owns 15 cars, and the person’s only been using them for personal use occasionally. But all of a sudden, Canada Revenue Agency says, the full value of those cars gets attributed to the person’s every year income.”
Loomer says it’s difficult for an average person to fully understand the 2,500 page tax act. And for business people, if they don’t have a good accountant to help them, they could fall into tax debt pretty easily.
“One thing that can benefit everybody is to simplify the income tax system, to harmonize different sets of rules,” says Loomer.
According to the Statement of Affairs document, Wilcox worked for two companies before he inherited the debt. The license of one of the companies has been revoked in 2013. But Wilcox is still the director of the WICO Construction Management Ltd.
“Hopefully, he has learned his lesson and pay taxes,” says Loomer.