We are often asked, how are tax refunds affected in a bankruptcy, as people are unsure whether income tax refunds are considered an asset or part of your income.
The short answer is, income tax refunds are considered an asset and will be recovered during a bankruptcy.
The CRA (Canada Revenue Agency) is required by law to send the trustee your income tax refunds for certain years, so the refund can be included in the amount that is paid to your creditors.
There are 3 main time periods before, during, and after your bankruptcy that need to be considered if you want to answer the question, how are tax refunds affected in a bankruptcy.
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Before Filing For Bankruptcy
If you still have unfiled tax returns for the years prior to your bankruptcy, your trustee will make sure that all of those returns have been filed with the CRA.
If you are entitled to a refund, this will be sent to your trustee and included in the amount payable to your creditors.
However, if you owe money, this will be included with the rest of your debts and handled accordingly during the bankruptcy process.
The Year That Bankruptcy Is Filed
All refunds during the year that bankruptcy is filed will also be sent to your trustee.
During this period, they need to file two returns; a pre-bankruptcy return and a post-bankruptcy return.
The pre-bankruptcy return covers from the 1st January up to the date that you filed for bankruptcy.
If there is a refund available, it is sent directly to your trustee, and if there is a debt to be paid, it is included in your bankruptcy.
This return works in the same way as the returns in the years prior filing for bankruptcy.
The post-bankruptcy return covers the period after filing for bankruptcy, up to the 31st December.
If there are refunds, they will be paid to the trustee, but things work differently if there are outstanding debts to be paid.
The return covers the period after filing for bankruptcy, which means that this debt will not be included in your bankruptcy and you will have to pay it yourself.
After Bankruptcy Is Filed
Once the post-bankruptcy return has been filed, your bankruptcy will no longer affect your tax returns.
In the years following bankruptcy, you will file returns as normal and any refunds will be paid to you.
If there are outstanding payments, you are responsible for them.
Throughout the bankruptcy, Canadian Child Tax Benefits will continue to be paid to you as normal because they are considered part of your income rather than an asset.
If you need a more in-depth answer to the question, how are tax refunds affected in a bankruptcy or you need some general advice about bankruptcy and other debt relief options, get in touch with us today.
You can reach us on the phone or fill out an evaluation form and we will get back to you.
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