How Does Bankruptcy Impact Tax Refunds?
People who file bankruptcy are often surprised to find out that the trustee receives his or her tax refunds.
This is one of the things that causes the most questions and complaints people have.
The reason tax refunds go to the trustee is that a person in bankruptcy can only keep equity in assets as set by the bankruptcy exemptions of the province or territory of residence.
Tax refunds are not an asset that the bankrupt can keep.
Any tax refunds that are owed to you at the date of your bankruptcy filing will be seized by the trustee and distributed to your creditors.
When you go bankrupt you will be required to file two tax returns, a pre bankruptcy and post bankruptcy tax return.
The pre bankruptcy return will cover the time from January 1st to the date of the bankruptcy filing.
The post bankruptcy return covers the period of time from the bankruptcy filing to December 31st. Both refunds (if any) will go to the trustee for the benefit of your creditors to whom you owe money.
The Canadian Revenue Agency (CRA) is notified of your bankruptcy when you file. CRA will send the refund cheques to your trustee. In most cases the trustee will prepare your pre-bankruptcy tax return and your post-bankruptcy tax return from information that you supply him.
Another common misconception is that people think that once they receive their discharge the trustee will not be able to receive their tax refunds.
This is not the case. Trustees have a right to the tax refunds regardless of when the person is discharged.
If you have any questions about this or other aspects of bankruptcy or consumer proposals you can set up a FREE consultation with our trustees, who are in every province and territory in Canada.