Understanding Your Tax Obligations under Bankruptcy

Declaring bankruptcy doesn’t absolve you of your tax responsibilities. Even in the midst of financial challenges, the Canada Revenue Agency (CRA) expects individuals to meet their tax obligations. For first-time Canadian bankrupts, understanding the nuances of taxation during and after insolvency is crucial to avoid potential pitfalls. Here’s what you need to know:

Pre-Bankruptcy Tax Debt.

When indebtedness becomes inevitable, your tax debts incurred before filing for indebtedness may be included in the proceedings. The trustee overseeing your financial failure will collaborate with the CRA to address these pre-existing tax obligations as part of the comprehensive bankruptcy process.

Post-Bankruptcy Tax Obligations.

Even during indebtedness, you are still accountable for filing income tax returns for each year within the insolvency period. The trustee may assist in preparing these returns. However, if your personal income tax debt exceeds $200,000 or represents 75% or more of the total unsecured proven claims, automatic discharge under section 172.1 of the Bankruptcy and Insolvency Act may not be applicable.

GST/HST and High-Tax Debtors.

While GST/HST payable isn’t factored into the high-tax debtor’s eligibility for discharge, taxes on additional income derived from shareholder loans, draws, or dividends are considered in the calculation. For high-tax debtors, the court imposes a discharge order after a hearing, a process distinct from that of non-high-tax debtors. Exploring alternatives, such as a consumer proposal under the BIA, may be advisable.

Tax Refunds and Credits.

During indebtedness, bankruptcy may absorb any tax refunds or credits you’re entitled to, settling creditor claims. Understanding how these funds could be utilized and their role in your financial recovery is crucial.

Post-Bankruptcy Tax Liabilities.

Once your bankruptcy discharge or completion occurs, you remain liable for taxes resulting from income earned afterward. Bankruptcy does not discharge these post-bankruptcy tax liabilities, highlighting the importance of maintaining ongoing financial responsibility.

Financial recovery.

Navigating the tax implications of bankruptcy requires professional guidance. Seeking advice from a tax professional ensures that you understand the specific impact of insolvency on your tax obligations. Their insights can be invaluable in making informed decisions as you work towards financial recovery.

While insolvency provides a path to financial relief, it doesn’t exempt you from fulfilling your tax obligations. Understanding the complexities of pre and post-bankruptcy taxation is crucial for first-time bankrupts.

Thank you for joining us on this exploration of taxation and reading this post until the end.

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