Treatment of the Quebec Solidarity Tax Credit under the Bankruptcy and Insolvency Act

September 24, 2012

Issue

The Office of the Superintendent of Bankruptcy (OSB) has been asked for its position regarding treatment, under the Bankruptcy and Insolvency Act (BIA), of the Quebec solidarity tax credit. Since 2011, this tax credit combines three existing refundable tax credits: the Quebec sales tax (QST) credit, the property tax refund and the credit for individuals living in northern villages. The OSB has been asked whether the solidarity tax credit is to be considered as income for the purpose of calculating surplus income obligations or whether it is to be considered as property of the bankrupt, thereby forming part of the estate of the bankrupt.

Position

The OSB's position is that, subject to court interpretation to the contrary, the Quebec solidarity tax credit is exempt from seizure. Therefore, the credit must be remitted to the bankrupt. However, because the amount paid under the solidarity tax credit is considered to be an overpayment of income tax by the individual, it is captured under the definition of “total income” in section 68 of the BIA and must be accounted for in the surplus income calculation.

Background

The solidarity tax credit provides relief to low-to middle-income households with regard to costs associated with the QST and housing, while also recognizing that the cost of living is higher in northern villages than elsewhere.

Analysis

The solidarity tax credit is set out in sections 1029.8.116.12 to 1029.8.116.35 of the Quebec Taxation Act.Footnote 1 Section 33 of the Quebec Tax Administration ActFootnote 2 provides that "every amount owing by the State in respect of a fiscal law as a refund is inalienable and unseizable." Therefore, the solidarity tax credit, pursuant to paragraph 67(1)(b)Footnote 3 of the BIA, is not property of the bankrupt that is divisible among creditors.

However, pursuant to section 1029.8.116.16 of the Quebec Taxation Act,Footnote 4 the amount paid under the solidarity tax credit is deemed to be an overpayment of tax payable for a taxation year by an individual. Since taxes payable can only be derived from revenue generated during the year by the individual and the solidarity tax credit is deemed to be an overpayment of income tax, the funds paid retain their character as income. Subsection 68(2) of the BIA provides that a bankrupt’s revenues of whatever nature (regardless of whether they are exempt from seizure) are captured by the definition of "total income." Therefore, while the bankrupt is entitled to retain the solidarity tax credit, it shall be accounted for by the trustee in the surplus income calculation under section 68 of the BIA.

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