Doing Your Taxes When Filing for Bankruptcy

Understanding Bankruptcy and Its Implication on Tax Filing

Navigating through the process of bankruptcy and understanding its impact on tax filing can be daunting. This guide will provide you with comprehensive insights into the definition of bankruptcy, how to file an income tax and benefit return during bankruptcy, and what happens to any tax refunds.

What Does Bankruptcy Mean?

Bankruptcy refers to a legal proceeding governed by Industry Canada under the Bankruptcy and Insolvency Act. This process can liberate a person from the majority of their debts.

Upon declaring bankruptcy, a trustee assumes control over your properties and assets. The trustee’s role includes liquidating the assets and placing the proceeds into a trust for the creditors in bankruptcy.

Entities responsible for enforcing the Bankruptcy and Insolvency Act includes the Innovation, Science and Economic Development Canada, the Superintendent of Bankruptcy, the Bankruptcy Tribunal, the Official Receiver in Bankruptcy, and the trustee.

A bankrupt individual is identified when the trustee submits a completed Form DC905, Bankruptcy Identification Form. This action should be carried out as soon as the trustee receives your estate number from the Office of the Superintendent of Bankruptcy.

Tax Filing During Bankruptcy

If you had to file an income tax and benefit return for the year preceding your bankruptcy and failed to do so, the trustee will file it on your behalf. The trustee also files a pre-bankruptcy return, which covers the period from January 1 up to the day before your bankruptcy declaration.

In some cases, the trustee may file an in-bankruptcy return to report income from liquidated assets such as RRSPs or businesses wound up for the benefit of creditors.

However, you are responsible for filing an income tax and benefit return for the post-bankruptcy period, which spans from the date of bankruptcy to December 31 if the trustee does not file one on your behalf.

When filing an income tax and benefit return for the year of bankruptcy, it’s crucial to specify whether it is a pre-bankruptcy, in-bankruptcy, or post-bankruptcy return. This should be indicated above the “Identification” section on page 1 of the return.

How Refunds are Handled

Refunds resulting from returns for years prior to the year of bankruptcy are treated as property of the bankruptcy estate. Hence, these refunds are directed to the trustee. However, refunds related to returns for years after the bankruptcy year are sent to you unless the trustee secures a court order.

For the bankruptcy year, any refund related to the pre-bankruptcy return is sent to the trustee. Refunds associated with the post-bankruptcy return are also sent to the trustee if your bankruptcy assignment date is July 7, 2008, or later. If your bankruptcy assignment date is earlier than this, post-bankruptcy refunds are sent to you unless the trustee has a court order or an Authorization and Direction letter.

Where to Find More Information

Relevant Forms and Publications

In conclusion, understanding the process of doing your taxes when filing for bankruptcy is essential. This guide provides you with a basic understanding of the process and the parties involved. However, it’s always advisable to seek professional help when navigating through bankruptcy and tax filing to avoid any legal complications.

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