Here’s what we will cover in this guide:

Does bankruptcy clear tax debt in Canada?

You’ll be happy to hear that you can declare bankruptcy on tax debt in Canada as long as the Canada Revenue Agency (CRA) hasn’t registered a lien on your property.

As far as creditors go, the CRA is a formidable one, and they are difficult to negotiate with. They collect government money owed for personal income tax, HST, employment deductions, student loans and benefit overpayments.

They have the power to garnish your wages, seize your assets or register a lien on your property. Nevertheless, any income taxes owing for previous years are covered through bankruptcy if you take action quickly.

Unpaid taxes and bankruptcy

Many people file for bankruptcy to deal with unpaid taxes.

If you proceed with bankruptcy, the CRA is treated the same as any other creditor.

However, the CRA will review your case and may attach specific conditions or request a creditors’ meeting.

When you complete your bankruptcy, any back taxes and penalties owed to the CRA will be eliminated.

How does bankruptcy affect tax returns?

There are tax considerations when you file for bankruptcy.

If you want to file for bankruptcy, you must:

  • File all unfiled tax returns for previous years.
  • File a pre-bankruptcy return: January 1st up to the day before your bankruptcy.
  • File an in-bankruptcy return (if required).
  • File a post-bankruptcy return: date of your bankruptcy to December 31st.

What happens if you have unfiled tax returns?

If you have income tax returns that haven’t been filed for previous years, your Licensed Insolvency Trustee will file any outstanding tax returns up to the date of your bankruptcy.

You will also file a pre-bankruptcy return (January 1st to the day before your bankruptcy) and a post-bankruptcy tax return (date of bankruptcy to December 31st) through your Licensed Insolvency Trustee.

Any taxes owed from the date of bankruptcy to December 31st will be your responsibility, but any tax debt owed for previous years will be eliminated by completing your bankruptcy.

Filing taxes during bankruptcy

Your Licensed Insolvency Trustee might file an in-bankruptcy return to report income from any liquidated assets, such as RRSPs, or assets from businesses that your trustee is winding up.

After your bankruptcy starts, you must file and pay any tax returns due throughout your bankruptcy term. Any refunds due are sent to you, and if you owe anything, you must pay it.

See also: Does bankruptcy affect income tax returns?

Can your bankruptcy trustee take your tax refund?

If you are due a tax refund for returns before the year of bankruptcy, this money is sent to your Licensed Insolvency Trustee to form part of your bankruptcy estate, which is distributed amongst your creditors.

This also applies to refunds for your pre-bankruptcy and post-bankruptcy returns. After the year of your bankruptcy, future tax refunds will be yours to keep.

Talk to your trustee about a consumer proposal, which gives you the right to keep all tax refunds.

Can the trustee take my tax refund after discharge?

Once you have completed your bankruptcy and received a discharge, You must complete your tax returns as usual, and refunds are sent to you by the CRA.

Bankruptcy and self-employment

If you are self-employed, you must file HST returns before filing for bankruptcy. Doing so allows the CRA to establish how much you owe.

What does the CRA do?

The Canada Revenue Agency has lots of powers to collect outstanding debts owed for things like:

  • Personal income tax
  • Corporate income tax
  • Payroll deductions
  • GST/HST
  • Benefit overpayments
  • Remittances
  • Student loans
  • Customs duties and taxes
  • CPP overpayments
  • EI overpayments.

If you do not pay your arrears, the CRA can take various actions, such as wage garnishments, set-offs, a lien on property or seizure of assets.

If you receive income from a property, this can be seized. Your bank account can also be frozen. Daily interest is applied to outstanding balances until you pay your balance in full.

If you have tax debts, it’s crucial to understand what the CRA can do, so read on.

Can the CRA look at your bank account?

The Canada Revenue Agency (CRA) can request information from you or your financial institution to determine if you have tax obligations.

They can access information from institutions that manage your bank account, credit card, RRSP and TFSA.

Your spouse’s financial information can also be reviewed.

Take action: deal with your tax debts through bankruptcy or consumer proposal.

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What assets can the CRA seize?

The CRA can seize assets, but it won’t happen straight away.

A legal notice called a Requirement to Pay is sent to you if you haven’t made a payment arrangement with the CRA.

If you are unable to pay, the CRA can apply for the registration of a certificate in federal court for unpaid debts, which has the same power as a court judgment.

CRA and wage garnishment

If you owe the CRA money, they can obtain a wage garnishment.

The CRA will send a requirement to pay notice to your employer, who is legally required to pay this money to the CRA instead.

A wage garnishment can be applied without formal notice or court order.

How much can the CRA garnish from my wages?

The CRA can garnish a substantial portion of your wages.

Employment type % of garnishment
Employee 50%
Contract worker 100%
Self-employed 100% of your accounts receivable

Source: Hoyes: How to stop a CRA wage garnishment

Does the CRA have the right of set-off?

Right of set-off allows a creditor, such as the CRA, to withhold money owed from another federal agency or department and use it to pay your CRA debt.

Can the CRA put a lien on my property?

The CRA can register a lien on your property, even if it is co-owned.

You must pay what’s owed before its removal. If you want to sell the property, the CRA must be paid first.

If the CRA registers a lien on your property, you cannot eliminate your tax debts through bankruptcy.

However, in some cases, the CRA might remove the lien if you file a consumer proposal that is acceptable to them.

See also: Does bankruptcy stop the Canada Revenue Agency (CRA)?

Conclusion

You can eliminate tax debts in bankruptcy as long as the CRA hasn’t registered a lien on your property.

If you want to file for bankruptcy, you must file all unfiled tax returns. Your Licensed Insolvency Trustee will assist you with filing a pre-bankruptcy and post-bankruptcy return. An in-bankruptcy return may also be required.

You lose tax refunds up to the year of your bankruptcy, but future returns are yours to keep.

Filing for bankruptcy can be a quick and effective solution to your tax debts. Through bankruptcy, you will pay less than your total debt, allowing you to take back control of your finances.

If you have tax debts, don’t wait until the CRA garnishes your wages, seizes your assets or registers a lien on your property.

Speak to a Licensed Insolvency Trustee about the best way to resolve your outstanding debts. Only a trustee can administer a bankruptcy to deal with tax debts.

A trustee may also recommend a consumer proposal as an alternative, which offers the same creditor protection but can offer more benefits than bankruptcy.

Tax debts can be complicated, but a Licensed Insolvency Trustee can explain your options, offer impartial advice and help you eliminate your debts.

All consultations are free, and there is no obligation.

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