Every year in Canada, taxpayers file a tax return to declare their income to the government, which results in a refund or an amount due to be paid.

When it comes to filing for bankruptcy, the tax return process is a bit different, and there are some tasks that you must carry out with assistance from a Licensed Insolvency Trustee.

In this column, we’ll cover everything you need to know about income tax returns and bankruptcy.

Income tax returns and bankruptcy

When you file for bankruptcy in Canada, the Canada Revenue Agency (CRA) will be notified, and you must file and pay any tax returns that are due throughout your bankruptcy term.

It’s important to file the necessary tax returns so the CRA can calculate if you owe any money and to ensure that you are discharged promptly.

The Bankruptcy and Insolvency Act states that you must file the following income tax returns when declaring bankruptcy:

  1. File all unfiled tax returns for previous years.
  2. File a pre-bankruptcy return.
  3. File an in-bankruptcy return.
  4. File a post-bankruptcy return.

Like all bankruptcies, they are carried out by a Licensed Insolvency Trustee (LIT or trustee). This is the person appointed to represent your estate who will administer your bankruptcy proceedings.

A trustee will file your tax returns before, during and after your bankruptcy, liaise with your creditors and guide you through the bankruptcy process from start to finish.

1. File all unfiled tax returns for previous years

If an income tax return was supposed to be filed for the year prior to the year of bankruptcy and you didn’t file one, your Licensed Insolvency Trustee must immediately file one for you.

Any refund due will be sent to your trustee. If you owe any money on the tax return, this debt will be included in your bankruptcy.

2. File a pre-bankruptcy tax return

Your trustee must file a pre-bankruptcy income tax return from January 1st up to the day before your bankruptcy.

Any refund due will be sent to your trustee, and any money owed on the tax return will be included as part of your bankruptcy.

3. File an in-bankruptcy tax return

Your trustee might also have to file an in-bankruptcy return to report income from liquidated assets or assets from your business if it’s being wound up for the benefit of your creditors.

4. File a post-bankruptcy tax return

An income tax return must be filed for the post-bankruptcy period from the date of your bankruptcy to December 31st.

You are responsible for filing your post-bankruptcy return, but your trustee can file a post-bankruptcy tax return on your behalf.

Any refund due will be sent to your trustee, and you must pay any money owed on this tax return as it is a new debt (not included in your bankruptcy).

Source: Government of Canada: Doing your taxes when filing for bankruptcy

Preparing an income tax return for bankruptcy

When filing an income tax and benefit return relating to your bankruptcy, you must clearly state that it is either a pre-bankruptcy, in-bankruptcy or post-bankruptcy return in the Identification section on the first page of the return.

How are tax refunds affected during bankruptcy?

If you are due a tax refund for previous years or the year of your bankruptcy, this money is put towards your bankruptcy estate.

The Canada Revenue Agency (CRA) is required to send the income tax refunds to your Licensed Insolvency Trustee to distribute this money to creditors.

Refunds for previous years

All refunds for returns before the year of bankruptcy are the property of the bankruptcy estate and will be sent to your Licensed Insolvency Trustee to be distributed among your creditors.

Refunds for pre-bankruptcy return

Refunds relating to the pre-bankruptcy return (for the year of your bankruptcy) will also be sent to the trustee.

Refunds for post-bankruptcy return

The same applies to refunds for post-bankruptcy returns; this money is sent to the trustee.

Refunds after the year of bankruptcy

Any refunds for subsequent years after the year of bankruptcy will be sent to you unless a court order says otherwise.

Source: Government of Canada: Doing your taxes when filing for bankruptcy

Keep all tax refunds with a consumer proposal

If you want to keep all tax refunds, you might want to consider a consumer proposal instead.

Always get advice from an experienced Licensed Insolvency Trustee to resolve your debts and understand your tax obligations.

Get debt relief

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Tax returns after bankruptcy

After your bankruptcy starts, future tax returns are not affected and must be completed as normal. Any refund due will be sent to you by the CRA, and if you owe anything, you must pay it.

How are HST rebates affected during bankruptcy?

Once you have declared bankruptcy, any HST rebates are the property of the bankruptcy estate and will be sent to your Licensed Insolvency Trustee for the benefit of your unsecured creditors.

Here’s a tip: get expert advice from a Licensed Insolvency Trustee.

Does bankruptcy affect my CCB payments?

Your Canada Child Benefit (CCB) payments are protected under the Bankruptcy And Insolvency Act. You will continue to receive them as normal during your bankruptcy.

Canada Child Benefit (CCB) is not included as an asset or income during bankruptcy.

See also: Will I receive my Canada child benefit (CCB) if I file for bankruptcy?

Conclusion

Income tax returns and bankruptcy might seem complicated, but the good news is that your Licensed Insolvency Trustee will help you file if you provide the required information.

You must file all of your unfiled income tax returns before bankruptcy, a pre-bankruptcy return, an in-bankruptcy return (if applicable) and a post-bankruptcy return.

If you are due a tax refund for previous years or the year of your bankruptcy, these will be sent to your trustee to be paid into your bankruptcy estate.

Bankruptcy helps you eliminate most unsecured debts, including tax debts.

If you are interested in filing for bankruptcy, book a free consultation with a Licensed Insolvency Trustee.

A trustee can offer impartial debt advice and may be able to recommend an alternative to bankruptcy.

Get debt relief

Free consultation with a Licensed Insolvency Trustee by video, phone or in person.

  • Experienced trustees
  • Local offices
  • Personalized plan
  • No fees
Get started

It only takes 30 seconds.

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