The Ontario Superior Court’s decision in Re Shaw, 2025 ONSC 6385 clarifies judicial interpretation of “total income” in section 68 of the Bankruptcy and Insolvency Act (“BIA”). While the surplus income regime is a familiar feature of Canadian bankruptcy law, the treatment of loans advanced during bankruptcy has remained surprisingly underdeveloped in jurisprudence. In Re Shaw, the Court addresses this gap by drawing a principled distinction between true loans and income, and underscoring the importance of fairness and the trustee’s advisory role in the bankruptcy process.
Background
Mr. Shaw filed an assignment in bankruptcy on April 5, 2024 and BDO Canada Limited was appointed as the trustee in bankruptcy (the “Trustee”). As part of the filing process, Mr. Shaw reported his monthly income and expenses in a Form 65. Based on this information, the Trustee determined that Mr. Shaw was not required to make any surplus income payments. As a first-time bankrupt with no surplus income to be paid, Mr. Shaw was eligible to receive an automatic discharge from bankruptcy after nine months.
In his statement of affairs, Mr. Shaw identified himself as a self‑employed real estate consultant and disclosed that he provided consulting services to Thomasfield Homes Limited (“Thomasfield”). He also disclosed that he received advances from Thomasfield. In the months following his bankruptcy, Mr. Shaw continued to receive monthly advances from Thomasfield by way of promissory notes. The amounts advanced were not included as income in the monthly income and expense statements he submitted to the Trustee.
Mr. Shaw maintained that these advances were loans, rather than payments for future services or amounts tied to invoiced work. He explained that repayment was uncertain as it would depend on whether he could secure viable real estate opportunities for Thomasfield, which were not guaranteed to come into fruition.
In November 2024, the Trustee advised Mr. Shaw that it had reclassified the Thomasfield advances as income. The Trustee notified the Office of the Superintendent of Bankruptcy and Mr. Shaw’s creditors that, in light of this reclassification, Mr. Shaw now owed surplus income and his automatic discharge period would be extended from nine months to twenty‑one months. Mr. Shaw disputed the Trustee’s characterization of the loans as income, and when the parties were unable to resolve the matter, it was brought before Associate Justice Rappos for determination.
Statutory Interpretation
The central issue in Re Shaw was whether the advances from Thomasfield fell within the meaning of “total income” under section 68 of the BIA. Section 68 establishes the surplus income regime and defines “total income” broadly to include a bankrupt’s revenues of “whatever nature or from whatever source earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge”, subject to certain exclusions. The Trustee relied on this broad language to argue that the advances received from Thomasfield during bankruptcy, regardless of form, should be treated as income.
The Court rejected this expansive reading. Associate Justice Rappos emphasized that, while section 68 uses broad terminology, the concept of “income” must still be interpreted in accordance with its ordinary meaning and the purpose of the surplus income scheme.
The amounts advanced to Mr. Shaw bore the hallmarks of bona fide loans, including interest accrual, fixed repayment terms, and the fact that it could be repaid at any time. The uncertainty of whether Mr. Shaw would secure a land deal that could generate funds to repay the Thomasfield amounts further weighed against treating these advances as income. The fact that repayment could be made through alternative means, including obtaining financing from another lender, underscored that these advances functioned as liabilities rather than earnings. As the advances created a debt and did not constitute money earned from work or received from investments, they did not fall within the definition of “total income” under section 68. Accordingly, the Court concluded that the surplus income regime was not intended to capture repayable loan amounts.
Fairness and Equity
Avoiding Double Repayment
The Court highlighted the practical unfairness of classifying the Thomasfield amounts as income. If the advances were treated as income, Mr. Shaw would effectively be required to repay the same funds twice, once to the Trustee as surplus income and again to Thomasfield as loan repayment. This outcome would be inequitable and inconsistent with the purpose of the surplus income regime, which is intended to ensure fairness, not to impose duplicative burdens on bankrupt individuals.
Trustee Advice and Reasonable Reliance
The Court further considered that Mr. Shaw had relied on the Trustee’s advice that borrowing during bankruptcy was permissible, provided he disclosed his bankruptcy status. Despite taking steps to confirm in advance that his actions were permitted, Mr. Shaw was never warned that such amounts might later be reclassified as income. This reasonable reliance weighed against the Trustee’s attempt to retroactively penalize Mr. Shaw. Associate Justice Rappos emphasized that a bankrupt should be able to rely on the guidance of the trustee.
The decision implicitly affirms that trustees are held to a high professional standard, requiring them to provide clear and accurate guidance and refrain from shifting positions in a way that prejudices debtors. Trustees must ensure that the financial advice they provide aligns with the law while considering the potential future implications of that advice.
Rehabilitation Principle
The Trustee argued that treating the advances as loans undermined the rehabilitative purpose of the BIA, which seeks to give debtors a “fresh start” free of debt. The Court acknowledged the importance of this principle but held that it was not directly relevant to the question at hand, namely, whether the amounts advanced to Mr. Shaw constituted “income” under section 68. Associate Justice Rappos noted that concerns about Mr. Shaw incurring additional debt could, if necessary, be addressed at a future discharge hearing. As such, the Court left open the possibility that the appropriateness of borrowing during bankruptcy may be examined later, but it was not determinative of the issue before the Court.
Conclusion
Re Shaw addresses a previously un-examined area of Canadian bankruptcy law by clarifying how “total income” under section 68 should be interpreted when a bankrupt receives loan advances during the bankruptcy period. By holding that bona fide loans do not constitute income, the Court prevents trustees from expanding the concept of income beyond its statutory and commercial meaning. The decision protects bankrupt individuals from the inequity of double repayment and highlights the importance of reliable guidance from trustees. In doing so, Re Shaw provides meaningful guidance for trustees, debtors, and insolvency practitioners alike, reinforcing the need for fairness in the administration of bankruptcy law.
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