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 you file for bankruptcy, the tax return process will differ slightly, 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.
Does bankruptcy affect income tax returns?
When you declare bankruptcy, you must file the following tax returns so the CRA can calculate if you owe any money and ensure that you are discharged promptly.
- File all unfiled tax returns for previous years.
- File a pre-bankruptcy return.
- File an in-bankruptcy return.
- File a post-bankruptcy return.
Like all bankruptcies, they are carried out by a Licensed Insolvency Trustee (or bankruptcy 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.
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 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).
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 on 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 belongs to the bankruptcy estate. The CRA will send this money to your Licensed Insolvency Trustee to distribute among your 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.
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.
Does bankruptcy affect my CCB payments?
Canada Child Benefit (CCB) payments are protected under the Bankruptcy And Insolvency Act, so you will continue to receive them during your bankruptcy. CCB is not treated as income in bankruptcy.
Income tax returns and bankruptcy might seem complicated, but the good news is that a Licensed Insolvency Trustee will guide you through the process.
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.
If you want to keep all tax refunds, you might want to consider a consumer proposal instead.
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