Supreme Court of British Columbia rules on Tax Refunds in Bankruptcy.
In a decision released December 14, 2023, the Supreme Court of British Columbia ruled that any tax refunds that a bankrupt may be entitled to prior to bankruptcy, due to the application of a Disability Tax Credit, vest in the Trustee and that the tax refunds are properly considered an asset of a bankrupt.
In the case of Re: Lynk, the bankrupt challenged the right of the Trustee to retain any tax refunds that pre-dated the bankruptcy, that were received as a result of the bankrupt applying for, and being approved for, a Disability Tax Credit (“DTC”) on her annual tax returns. The Court also stated that the application of the DTC is not a refund itself, as many refer to it as, but a non-refundable tax credit that reduces an individual’s taxable income which may be applied to that person’s taxable income. The application of the DTC gives rise to a Tax refund, not a “Disability Refund”. Nothing more, nothing less.
The result of this case also confirms the correctness of the Position Paper published by the Office of the Superintendent of Bankruptcy that states that any tax refunds that arise as a result of the application of the Disability Tax Credit are property of the Bankrupt.
The takeaway is that DTC’s are not refunds. They are tax credits that, when applied, may give rise to a tax refund. But a DTC in itself is not a refund as so many term it as. It further confirms that tax refunds for years that pre-date the bankruptcy are property of the bankrupt and vest in the Trustee.