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Modifying Conditional Orders of Discharge

By: L.W. Houlden and Geoffrey B. Morawetz

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Re Hendsbee (2014), 2014 NSSC 148, 2014 CarswellNS 304 (N.S. S.C.)

Mr. Joseph Hendsbee made an assignment in bankruptcy on May 11, 2004. His sole creditor was Canada Revenue Agency ("CRA"), which was owed $64,764. Mr. Hendsbee was granted a discharge on October 1, 2005 on condition that he pay into his estate $7,200, file returns for 2004, 2005 and 2006 income and pay the taxes for those years. He paid the $7,200 but had not filed these returns.

From 2004 to 2012, Mr. Hendsbee's main source of income had been from work as an installation subcontractor for Vintage Hardware Floors ("Vintage"). He earned approximately $50,000 per year during this period. He filed income tax returns for some years and not for others. In the years he did not, CRA issued arbitrary income tax and HST assessments. CRA had been collecting some of the assessed tax by issuing Requirements to Pay to Vintage. Mr. Hendsbee remained substantially indebted to CRA for taxes during these years.

In September 2012, Mr. Hendsbee became an employee of D. Procure Construction ("Procure"). Procure withheld from his pay the appropriate amount for taxes.

Mr. Hendsbee is a single father supporting two young children. His estranged wife has no contact with him or the children. He receives no support from her. He earns $15 per hour. He works on good weeks 40 hours. After child care expenses, the available monthly income is about $1,000, substantially less than $3,070 as provided in the Superintendent's standards.

Registrar Cregan noted that it was suggested that the money collected through Requirements to Pay may have covered the taxes owed for 2004, 2005 and 2006. However, Mr. Hendsbee had no records by which he could prepare returns. Furthermore, he did not have the resources to hire an accountant to assist him.

The Registrar noted that in order for Mr. Hendsbee to work, he must pay for daycare for his children. The only practical alternative was for him to look after the children full-time and seek social assistance.
Counsel for CRA and the Trustee agreed that the application should proceed under subsection 172(3) of the Bankruptcy and Insolvency Act ("BIA") which reads:

(3) Where at any time after the expiration of one year after the date of any order made under this section, the bankrupt satisfies the court that there is no reasonable probability of his being in a position to comply with the terms of the order, the court may modify the terms of the order or of any substituted order, in such manner and on such conditions as it may think fit.

Registrar Cregan noted that, in effect, the Court was being asked to modify the terms of the conditional order to eliminate the requirement that Mr. Hendsbee file returns for 2004, 2005 2006, and pay any unpaid taxes arising therefrom, and grant him an absolute discharge.

On the record, Registrar Cregan noted that there was no doubt that with his limited income, the expenses of daycare for his children, the expenses and difficulties which would be incurred in preparing returns, and his inability to make payments, he was satisfied that there was no reasonable probability of Mr. Hendsbee being in a position to comply with the outstanding terms of his conditional order of discharge.

However, counsel to CRA submitted that the matter was not quite that simple. She referred to McKeage, Re (2003), 40 C.B.R. (4th) 93, 2003 ABQB 213, 2003 CarswellAlta 304 (Alta. Q.B.), and Appleby, Re (2001), 2001 CarswellOnt 2816, 27 C.B.R. (4th) 1 (Ont. S.C.J.). In Appleby, Deputy Registrar Sproat referenced the decision of Farley J. in Cowie, Re (1991), 6 C.B.R. (3d) 227, 1991 CarswellOnt 194 (Ont. Bktcy.) as setting forth the tests on a motion to vary brought pursuant to section 172(3) of the BIA.

At paragraph 5 of Cowie, the tests are whether or not:
(1) there has been a change in circumstances since the order was made, and whether the changes were in the bankrupt's control;

(2) material indicating that the bankrupt cannot comply with the terms of the order (must be more than a statement of income and expenses);

(3) the credibility of the bankrupt; and

(4) evidence that the bankrupt has made a bona fide effort to comply with the discharge order during the preceding year.

Registrar Cregan noted that there is no doubt that these tests are critical and appropriate in most applications under this subsection. However, he did not think that they were conclusive, and that the keywords are:
... no reasonable probability of his being in a position to comply with the terms of the order.
After reviewing the evidence, Registrar Cregan concluded that Mr. Hendsbee did not have any ability to do what was required of him. He had no records. It may be that the tax in issue had been paid, but the Registrar did not know. Further, Mr. Hendsbee did not have any surplus income. He should be allowed to be discharged. He could then make a second assignment which would encompass what, if anything, remained owing from 2004 to 2006 and subsequent years. This would be a convenient forum to deal with such outstanding matters. The Registrar did not see that it would in any meaningful way prejudice CRA. Registrar Cregan also noted that Mr. Hendsbee's primary concern was that he be able to look after his children and that this should be the primary concern of society.

In the result, Registrar Cregan concluded that Mr. Hendsbee was entitled to have his discharge order modified so that he would be discharged absolutely.

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