Bankruptcy is a financial solution designed to provide relief to individuals and businesses overwhelmed by debt. However, it’s a serious step with long-term consequences and should be considered as a last resort. The decision to file for bankruptcy in Canada should never be taken lightly – it is an admission of insolvency and can significantly impact your ability to access credit in the future.
Does Bankruptcy Erase Tax Debt in Canada?
In most circumstances, tax debt, like other unsecured debt, can be discharged through bankruptcy in Canada. This implies that upon the successful completion of your bankruptcy process, your tax debts could be eradicated. However, there are specific rules and exemptions associated with tax debts in bankruptcy, which necessitates the need to consult with a Licensed Insolvency Trustee to ensure you’ve explored all avenues.
Types of Tax Debts Dischargeable
Generally, bankruptcy can wipe out various types of tax debts including income tax, GST/HST, liability deductions, and more. In other words, upon the successful completion of your bankruptcy, you no longer owe the Canada Revenue Agency (CRA) any money related to these tax debts.
However, for individuals owing more than $200,000 in tax debt, the regulations and bankruptcy laws are a bit more stringent. Although a good chance exists for your debts to be forgiven during bankruptcy, an automatic discharge may not be possible.
Tax Debts That Are Not Dischargeable
Not all tax-related debts can be discharged through bankruptcy. For instance, government overpayments, usually arising from social assistance or employment insurance, may not be included in bankruptcy. These debts might persist even after bankruptcy, depending on how the overpayment was managed.
Eligibility for Tax Debt Relief Through Bankruptcy
If you’re struggling with financial obligations and can’t afford to pay your taxes, bankruptcy might offer a way out. Most tax debts can be included in bankruptcy, although there are some exceptions.
For instance, if you have more than $200,000 in tax debt, which represents at least 75% of your entire unsecured debt, you may not be eligible for an automatic bankruptcy discharge. Instead, you’ll need to attend a court hearing to get your bankruptcy discharged.
Impact of Bankruptcy on Credit
Filing for bankruptcy leaves a mark on your credit report for 6-7 years after discharge, and your credit rating drops to R9, which is the lowest possible. This can adversely affect your credit scores and your ability to qualify for a loan in the future. It’s imperative to check your credit score and ensure the bankruptcy remark is removed after the stipulated period.
How The Courts Decide on Bankruptcy and Tax Debt
The courts consider each person’s financial circumstances carefully when deciding on bankruptcy cases. They might display some leniency, determining that only a fraction of the income tax principal would suffice for a fair settlement. Conversely, the courts could take a stringent approach, particularly if a person has filed for bankruptcy in the past.
Considerations Before Filing Bankruptcy for Tax Debt
Before you decide to file for bankruptcy to alleviate your tax debt, consider the following:
- Are you insolvent? Bankruptcy is a viable option if you’re unable to pay your tax debts.
- How much tax debt do you have? If your outstanding tax debt exceeds $200,000 and makes up over 75% of your entire unsecured debt, this could complicate your bankruptcy proceedings.
- Bankruptcy won’t remove tax liens. If the CRA has already placed a lien on a property prior to filing, declaring bankruptcy won’t remove it.
Other Alternatives to Bankruptcy
Before choosing bankruptcy, you should consider other less severe options like:
- Consumer Proposal: You can use a consumer proposal to eliminate your tax debt in Canada.
- Payment arrangements: If you’re unable to pay your tax debts right away, you can arrange a payment schedule with the CRA.
- Waived Interest and Penalties: Depending on your situation, the CRA may grant you some leniency and waive your tax penalties and interest.
Conclusion
While bankruptcy can clear tax debt in Canada, it’s crucial to speak with a professional before proceeding. A Licensed Insolvency Trustee can help you create a plan to deal with your debt, providing the best way to conquer it and finally build a debt-free life.
Frequently Asked Questions
- Can you declare bankruptcy on CRA debt? Yes, you can eliminate your tax debt when you file for bankruptcy, along with other unsecured debt. However, there are some exceptions.
- Can the CRA garnish my wages? Yes, the CRA can garnish your wages if you are past due on your taxes owing.
- Can filing a consumer proposal get rid of tax debt? Yes, a consumer proposal can provide debt relief from the CRA. Tax debt can be included in a consumer proposal, and the CRA may accept less than the full amount you owe, depending on your situation.
