TAX RETURNS AND TAX DEBT AFTER FILING FOR BANKRUPTCY

Greater Vancouver insolvency trustees at Campbell Saunders Ltd. can answer your questions about how personal bankruptcy impacts your income tax refunds, tax debts, and the filing of tax returns. In fact, your licenced insolvency trustee will play an important role in navigating the tax aspects of the bankruptcy process. Here are some of the tax-related considerations and implications of filing for bankruptcy.

 

How your insolvency trustee helps with tax issues

 

Your licenced insolvency trustee or “LIT” is the person who administers your property and assets during the personal bankruptcy process. When you file for bankruptcy, your LIT will notify the Canada Revenue Agency (CRA). Your LIT will then see to the filing of the following tax returns on your behalf:

  • The previous year’s tax return, if unfiled. If you did not file a return in the year prior to filing for bankruptcy, your LIT will immediately file a return for that year on your behalf.
  • Your “pre-bankruptcy” return, which covers the period from January 1 to the day before the date you filed for bankruptcy.
  • Your “post-bankruptcy” return, which covers the period from the date you filed for bankruptcy to December 31 of that year.

 

The LIT will also file another return on your behalf, called an “in-bankruptcy” return for assets redeemed by the Trustee during the bankruptcy period. ie redemption of RRSPs, sale of shares, sale of rental property. 

 

The LIT will also file other tax years prior to the bankruptcy year if the Trustee deems this for the best benefit of the bankrupt estate.

 

What if you have unfiled tax returns from other years?

 

It would be best that outstanding unfiled income tax returns for any other years leading up to your bankruptcy must be filed immediately to avoid arbitrational assessment by CRA. Your insolvency trustee can guide you on what is needed to bring your CRA filings up to date.

 

What happens if you are entitled to an income tax refund when you file for bankruptcy?

 

If, after filing the prior/pre/post bankruptcy income tax returns there is a tax refund, you do not get to keep it. A tax refund is considered a non-exempt asset. 

Any such refund (net of CRA pre-bankruptcy owing offsets)  is sent directly from the CRA to your insolvency trustee, who includes it in the proceeds available to your creditors to settle your debts.

 

What if you owe income tax for the period before filing bankruptcy?

 

If you owe money to the CRA for income taxes, it is a debt that is dealt with as part of your personal bankruptcy. Generally speaking, income tax debt is “unsecured” debt, discharged by filing for bankruptcy. If, however, you owe money on your post-bankruptcy tax return, you must pay it as it is (as the name of the return suggests) debt that arose post-bankruptcy.

 

What happens in the years after the bankruptcy year?

 

The tax years that come after the bankruptcy year are not affected. If you are entitled to an income tax refund in these years, you will receive it. If you owe income taxes, you must pay that amount to the CRA.

 

What about a consumer proposal?

 

Greater Vancouver LITs at Campbell Saunders Ltd. are often asked about dealing with tax debt in a consumer proposal. Tax debt up to the date of a consumer proposal can be included, just as it can with a personal bankruptcy, as it is unsecured debt. As your creditor, the CRA will need to vote on your proposal, but it will usually accept the proposal, particularly if certain issues are addressed (e.g., file any unfiled income tax returns; agree to future tax compliance). A significant benefit of a consumer proposal is that you are entitled to keep any income tax refunds. If you are entitled to a refund, it will be paid to you, not to your LIT to go to your creditors. This is because you are not required to surrender non-exempt assets when making a consumer proposal.

 

Who can I contact for guidance on dealing with tax debt in Greater Vancouver?

 

Licenced Insolvency Trustees at Campbell, Saunders Ltd. offer legal guidance on the subject of personal bankruptcy in Greater Vancouver. We will explore all available options, including bankruptcy and consumer proposals, and make sure that all your questions are answered. Get in touch with us today to book your free and confidential initial consultation. You can meet in-person with our insolvency trustees (Richmond and Vancouver office locations). Virtual meetings are also available.

 

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