Income tax debt is considered unsecured debt, meaning any income tax owed will be cleared by the bankruptcy.
Income Tax Debt & Bankruptcy
Filing bankruptcy for tax debt: How bankruptcy clears taxes debts owed to the Canada Revenue Agency.
CRA Tax Debt & Bankruptcy
When a bankruptcy is filed, taxes owing to Canada Revenue Agency are usually considered unsecured debt and can be included in your bankruptcy.
Tax debts for HST, source deductions, and any director’s liability for corporate tax debts, are all considered unsecured debt will be discharged in bankruptcy or a consumer proposal.
Income Tax Reporting in Bankruptcy
When a bankruptcy is filed, your income tax will be reported to Canada Revenue Agency (CRA) on four possible tax returns:
- prior-bankruptcy income tax return
- tax return that reports income earned the year before you file
- any amount you owe on this return will be included in the bankruptcy
- pre-bankruptcy return
- tax return that reports income earned from 1st of January of the year of bankruptcy
- any monies owing on this return will be included in your bankruptcy
- in-bankruptcy income tax return
- reporting income from liquidated assets e.g. RRSP’s
- post-bankruptcy income tax return
- tax return that reports income earned from date of filing to 31st of December
- any monies owing on this return, you will be responsible to pay
- tax return that reports income earned from date of filing to 31st of December
The tax returns are filed by the Insolvency Trustee using information you provide, e.g. T4 slips etc.
Businesses Taxes & Bankruptcy
As with personal taxes, taxes owed to CRA are considered unsecured credit.
Where a business files for bankruptcy, all taxes owed for such things as HST, Payroll taxes, Health taxes and corporate taxes owed are considered unsecured credit and are cleared in bankruptcy.
Any tax refunds are held by the trustee to be distributed to any creditors.
Tax Refunds & Bankruptcy
Tax refunds that are issued for the year of bankruptcy and any years prior to the year of bankruptcy, are considered to be the property of the bankruptcy estate.
This includes tax refunds from prior to the bankruptcy, pre-bankruptcy, an in-bankruptcy or a post-bankruptcy.
Any tax refunds will be sent to the trustee directly by Canada Revenue Agency.
Alternatives to Bankruptcy
If you’re considering a bankruptcy, let’s have a discussion about your finances first. We can review your debts and discuss alternatives such as:
- consolidation loans
- financial counselling
- consumer proposals
After speaking with us people learn that there are alternatives like consumer proposals that are cheaper, less invasive and allows them to keep their assets instead of losing them in bankruptcy. We’re here to help, give us a call today at 905‑721-7506, free to call without obligation.
Speak to an Insolvency Trustee
Questions about insolvency and bankruptcy? I invite you to call our office to speak to myself or one of our insolvency trustees.
We’re happy to speak over the phone or in-person at one of our offices.
Where you have questions or need some advice, please feel free to give us a call without cost or obligation.
Call us today at 905-721-7506.
