The Influence of Bankruptcy or Proposal on Your Taxes and GST Credits: A Comprehensive Analysis
As the tax season rolls around, you may find yourself contemplating the intricate intersection of taxes, GST credits, and insolvency procedures like bankruptcy or consumer proposal. This article aims to demystify this complex subject. Let’s delve into the details of how your taxes and GST credits could be impacted by a bankruptcy or a proposal.
Overview
Filing for bankruptcy or a proposal can have significant implications for your financial situation, including your taxes and GST credits.
Impact on Taxes: Bankruptcy vs. Consumer Proposal
Bankruptcy
In Canada, bankruptcy can discharge most tax debts, including personal income, directors’ liabilities, and GST debts. The Stay of Proceedings that comes into effect when you file for bankruptcy also applies to the Canada Revenue Agency (CRA), meaning no further collection action can be taken. This protection covers tax debt up to the date of filing. However, any tax debt incurred after filing for bankruptcy remains your responsibility.
Consumer Proposal
In contrast, a consumer proposal treats the CRA as an unsecured creditor for most tax-related debt. Like bankruptcy, it covers all debt up to the filing date, and the CRA retains the right to offset any pre-proposal tax refunds against the debt.
Filing Tax Returns During Bankruptcy or Proposal
Bankruptcy
When you declare bankruptcy, you must provide the Licensed Insolvency Trustee (LIT) with your tax information for the bankruptcy year and the preceding year if not already completed. The LIT ensures timely tax filing, dividing the bankruptcy year into pre-bankruptcy and post-bankruptcy periods. If there’s no tax debt, any refunds for these years go directly to the LIT for the benefit of the creditors.
Consumer Proposal
In the case of a consumer proposal, all tax returns must be filed up to the proposal date. The LIT will file a provisional tax return for the pre-proposal period if applicable. If you don’t have any tax debts, you’ll continue to file your taxes as usual, with any refunds paid directly to you.
Interest on Overdue Taxes
It’s important to note that the prescribed rate was raised to 8% in the first quarter of 2023. This means that until you have the protection of a Stay of Proceedings that comes with filing a bankruptcy or proposal, interest on overdue taxes will be charged at this increased rate.
Receiving Tax Refunds and GST Credits
Bankruptcy
During bankruptcy, the government will issue any tax refunds, GST credits, and the BC Climate Action Tax Credit (BCCATC) directly to the LIT. These are considered property of the bankruptcy for the creditors’ benefit. However, GST credits only become property in bankruptcy if no dividends are available to the creditors Rule 59, Bankruptcy and Insolvency Act.
Proposal
During a proposal, all tax refunds and credits will be sent directly to the taxpayer as the LIT has no interest in them.
Exemptions for Tax Debt
Certain tax debts can survive bankruptcy or a proposal. The exemptions are any debt that could be subject to a demand under subsection 224(1.2) of the Income Tax Act or any substantially similar provision of provincial legislation.
Bankruptcy vs. Consumer Proposals: A Comparative Analysis
A bankruptcy is a legal proceeding designed to discharge most debts and give an honest debtor a fresh financial start. Learn more about bankruptcy here.
A consumer proposal, on the other hand, is a legally binding agreement that allows a debtor to repay a percentage of their debt over a specified period, reducing their debt load to a manageable amount. Learn more about consumer proposals here.
Expert Assistance
If you have any questions regarding the impact of a bankruptcy or proposal on your taxes and GST credits, contact us today. With over 30 years of experience, we offer free initial consultations and provide personalized advice tailored to your individual needs.
Conclusion: How Will My Taxes and GST Credits Be Impacted by a Bankruptcy or a Proposal?
Understanding the intersection of taxes, GST credits, and insolvency procedures is critical when considering bankruptcy or a proposal. It is always a good idea to seek professional help when navigating these complex issues.
