Bankruptcy and the Filing of Taxes

Filing Taxes When Going Bankrupt

When you go through bankruptcy, your primary concern is to stop debt collectors harassing you with phone calls and letters.

The matter of filing taxes for the year, however, doesn’t automatically go away.

You still have to report to the CRA (Canada Revenue Agency).

But how does it work in a year in which you go bankrupt?

You Need To File Two Tax Returns

When you go bankrupt, you need to split the tax year into two parts.

The first is the chunk of the year that runs from January 1 to the day before the bankruptcy date.

And the second – the post-bankruptcy period – runs from the official start of your bankruptcy to the end of the tax year, usually December 31.

You must, therefore, complete two separate returns.

 

  • The pre-bankruptcy return details all of your income and tax information for the first part of the year.
  • The post-bankruptcy return shows all of the money you earned after the date of bankruptcy

 

Bankruptcy, remember, is a legal process that clears all of your debt up until the date it takes effect, including any tax that you owe.

So when you complete the pre-bankruptcy return, you’re telling the authorities that you don’t owe taxes for that part of the year.

The post-bankruptcy return, however, operates just like any other tax return.

You must still pay any taxes you accumulate regardless.

The difference between these two returns highlights an essential point about bankruptcy.

It illuminates how this legal facility is akin to drawing a line in the sand.

It protects you from all of the debt you accumulated before the date of bankruptcy, but it does not rule out your obligation to pay tax and liabilities in the future.

So, if you go into debt after the date of bankruptcy – either with the tax authorities or anyone else – then you must still pay.

If you don’t, then you will have to deal with debt collection agencies all over again.

You May Lose Refunds The Tax Authority Owes You

The second significant change to the filing of taxes during bankruptcy concerns the treatment of refunds.

If you go bankrupt, it clears all your previous tax debt as discussed, but it also disqualifies you from receiving refunds in the current or past years.

In other words, you won’t receive any money back from the CRA, even if you overpaid in previous years.

So where does this money go, if not into your bank account?

Typically, the refund goes to the trustee acting on behalf of your creditors.

The tax authority sends them a cheque.

They will then distribute the money to them, according to their scheme.

When To Seek Professional Assistance

Filing your taxes is a challenging process at the best of times, but it is even more convoluted when you go through bankruptcy.

It is essential, therefore, to seek the help of professionals to ensure that you make the correct payments and clear the debt correctly.

Please post a follow up comment below:

(Note: Comments are reviewed before posting.)