Does Bankruptcy Clear Tax Debt In Canada?

Facing the burden of tax debts can be a harrowing experience. For many Canadians, the looming question is, ‘Does bankruptcy clear tax debt in Canada?’ Understanding the dynamics of bankruptcy and tax debts in Canada is crucial for those grappling with this issue.

Understanding Bankruptcy and Tax Debt

What is Bankruptcy?

Bankruptcy is a legal procedure that allows individuals or businesses, unable to meet their financial obligations, to eliminate their debts. This is accomplished under the protection of the Bankruptcy and Insolvency Act in Canada. It is generally considered a last resort for debt relief, typically utilized when other remedies have failed.

The Interplay Between Bankruptcy and Tax Debt

Tax debts are typically considered unsecured debts. This means they are not tied to any physical asset, like a house or car. When a person files for bankruptcy, most unsecured debts can be cleared or ‘discharged’, including credit card debts, personal loans, and tax debts.

However, not all tax debts can be discharged through bankruptcy. Certain exceptions make some types of tax debts non-dischargeable.

Types of Tax Debts and Bankruptcy

Tax Debts Eligible for Forgiveness Through Bankruptcy

Bankruptcy can clear various types of tax debts, including income tax, liability, GST/HST, and deductions. This is possible if these debts are unsecured and do not involve any liens or claims on property assets by the CRA (Canada Revenue Agency).

Tax Debts Not Eligible for Forgiveness Through Bankruptcy

However, not all tax debts are dischargeable in bankruptcy. This commonly includes government overpayments that often come from social assistance or employment insurance benefits. These debts may not be discharged and could potentially remain even after bankruptcy.

Criteria for Tax Debt Relief Through Bankruptcy

To qualify for tax debt relief through bankruptcy, there are certain criteria that need to be met:

Insolvency

You must demonstrate that you are unable to repay your tax debts. This is verified by the CRA by assessing your financial situation in detail.

Meeting with Creditors

In some cases, the CRA may require additional information and may call for a creditors meeting. This typically happens when there’s evidence suggesting that sufficient effort was not made to file tax returns or repay other types of debts before filing for bankruptcy.

Amount of Tax Debt

If your outstanding tax debt exceeds $200,000 and it forms at least 75% of your total unsecured debt, this could complicate your bankruptcy proceedings. In such scenarios, you will need to attend court, where a judge will determine the terms and conditions for your discharge from bankruptcy.

Tax Refunds

When declaring bankruptcy with outstanding tax debt, you’ll lose tax refunds up to the year of filing. This means any refunds owed to you by the CRA for the year you declare bankruptcy will be withheld or kept by the trustee as a bankruptcy asset.

Tax Liens

If the CRA has already placed a lien on your property for your tax debt, bankruptcy will not remove this lien. Since liens turn tax debts into secured debts, bankruptcy usually does not deal with such debts.

Alternatives to Bankruptcy for Clearing Tax Debt

While bankruptcy can be an effective way to clear tax debt, there are other less severe options that you should consider:

Consumer Proposal

A consumer proposal is a legally binding agreement that provides protection from debt collectors. It offers the opportunity to repay a specific amount of your total debt, and creditors agree to forgive the rest.

Payment Arrangements

If you can’t pay your tax debts right away, you may be able to negotiate a payment schedule with the CRA. However, this requires you to demonstrate that you have made significant efforts to repay the tax debt.

Waiving Interest and Penalties

In certain special circumstances, the CRA may waive penalties and interest on your tax debts. However, it’s important to remember that they will not relieve you of the entire debt.

Final Thoughts

The question of ‘Does bankruptcy clear tax debt in Canada?’ does not have a simple ‘yes’ or ‘no’ answer. It is highly dependent on your specific situation. If you’re struggling with tax debt and considering bankruptcy, it’s advisable to seek professional advice. A licensed insolvency trustee can help you understand your options and guide you through the process, ensuring that you take the best possible course of action.

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