Bankruptcy Payments and Tax Deductions
Introduction
The question, “Are bankruptcy fees tax deductible in Canada?” is a common query often posed to us. This article aims to elucidate the tax implications of bankruptcy fees in the context of various Canadian insolvency proceedings. It’s essential to note that we are Licensed Insolvency Trustees, not income tax consultants. This article aims to provide a general overview and should not replace professional tax advice. In case of specific circumstances, it’s advisable to consult a professional tax advisor.
Canada Revenue Agency’s Stance
The Canada Revenue Agency (CRA) classifies bankruptcy filing costs into two categories:
- Expenses incurred for generating or earning income from a business or property.
- Expenses incurred for capital or non-income generating purposes.
In simpler terms, one cannot deduct personal expenses but can deduct business expenses. So, are bankruptcy fees tax deductible in Canada? The answer depends on the debtor’s identity.
Personal Bankruptcy and Proposal Restructuring
In instances of high debt, individuals may opt to restructure under proposal provisions to avoid bankruptcy, or file for bankruptcy. In such scenarios, you’re not paying professional fees per se. Instead, you’re making payments to the Licensed Insolvency Trustee to settle all debts.
Under these circumstances, the Licensed Insolvency Trustee receives their fee under the Bankruptcy and Insolvency Act (BIA). As an individual debtor, you’re not incurring bankruptcy expenses to generate income. Therefore, you’re not entitled to any tax deduction for the amounts and property given to the Licensed Insolvency Trustee.
Corporate Restructuring
Corporations may attempt to restructure under the proposal provisions of the BIA or the restructuring provisions of the Companies’ Creditors Arrangement Act (CCAA) to avoid bankruptcy. The objective is to remain an active corporation, preserve jobs, continue generating income, and pay income tax.
In such cases, professional fees paid to legal and financial advisors would be tax deductible for the restructuring company. However, this article only addresses the tax implications of professional fees, not the income tax treatment of corporate debt forgiven in a successful restructuring. Thorough professional tax advice is necessary for that.
Corporate Bankruptcy
In a corporate bankruptcy, the bankrupt corporation’s assets are taken over by the Licensed Insolvency Trustee, subject to the interests of secured creditors and trust claimants. Consequently, the bankrupt corporation does not pay any fees to generate income. Thus, no tax deduction for professional fees can be claimed on the bankrupt corporation’s final income tax return.
Receivership and Secured Creditors
Receivership is a remedy for secured creditors to enforce security. In such cases, the secured creditor appoints a receiver to take possession of the assets, formulate a plan to maximize the sale value, sell the assets, and remit the proceeds to the secured creditor.
The company in receivership does not incur professional fees, but the secured creditor does. These professional fees incurred in the normal business of the lender are therefore tax deductible.
Asset Purchasers
In corporate restructuring, the restructuring plan often calls for the sale of assets. In both bankruptcy and receivership, the assets will be sold. The purchaser of assets will need insolvency and income tax professional advisors in structuring and paying for the asset purchase. Those professional fees are tax deductible to the purchaser.
Unsecured Creditors
In any of the insolvency processes discussed in this blog, there will certainly be many unsecured creditors. The major unsecured creditors, especially in corporate insolvency proceedings will want to consult with professional advisors as to their rights and remedies when faced with an insolvent debtor.
In such cases, the professional fees are paid in the normal course of business and will be tax-deductible.
Insolvency Advice Necessity
If you require insolvency advice, either because you or your company have too much debt, or one of your major customers is experiencing financial problems, the professional fees may very well be tax deductible.
Conclusion
In conclusion, the question of “Are bankruptcy fees tax deductible in Canada?” is a complex one with varying answers depending on the specific circumstances. It’s always advisable to seek professional advice in such cases to ensure you’re making the most appropriate financial decisions.
Contact a debt expert – a professional trustee – who can help get you on solid financial footing. Bankruptcy Canada can help keep you from financial ruin with immediate action and the right plan. Call us today for a free, no-obligation consultation.
