Understanding the Mechanism of Income Tax Return Filing in Bankruptcy
The process of How Your Income Tax Return Is Filed During Bankruptcy can seem like a daunting task, particularly when you’re dealing with the stress of financial insolvency. However, the procedure is more systematic than it seems. This article aims to demystify this process and help you understand how your income tax return is managed during bankruptcy.
Bankruptcy and Income Tax Return: The Division
During bankruptcy, the tax year is bifurcated into two distinct periods:
The period before bankruptcy (Pre-Bankruptcy): This timeframe spans from the start of the year till the day before you declare bankruptcy.
The period after bankruptcy (Post-Bankruptcy): This period commences from the day you declare bankruptcy and lasts until the end of the year.
This division gives rise to the necessity for two tax returns within a single year.
Unraveling the Need for Two Tax Returns
Two tax returns? Sounds confusing, right? Allow me to explain. The need for two tax returns is tethered to the concept of dischargeability of the tax debt.
Pre-Bankruptcy Tax Debt: This debt is considered to have occurred before the bankruptcy declaration. Hence, this debt forms part of your bankruptcy and can be discharged once the bankruptcy process has been successfully completed.
Post-Bankruptcy Tax Debt: This debt is perceived as new debt, and you are accountable for remitting this to the revenue agency.
Pro tip: Swiftly provide your Licensed Insolvency Trustee (LIT) with your tax slips. Bankruptcy returns take longer to process. Prompt submission ensures uninterrupted government benefits like Child Tax Benefit, Guaranteed Income Supplement, and GST Credits.
The Role of Licensed Insolvency Trustee in Filing Returns
According to section 22 of the Bankruptcy and Insolvency Act, a Licensed Insolvency Trustee (LIT) is only required to file the Pre-Bankruptcy income tax return and the previous year’s return if you have not done so. Although LITs are not required to file your Post-Bankruptcy income tax return, some firms choose to take care of this on your behalf to simplify the process.
Dealing with Unfiled Returns
If you have unfiled tax returns from previous years, your LIT may choose to file them to capture any income tax refunds or GST tax credits that may be available for the estate. If there are no refunds or credits available, it is unlikely that the LIT will file these returns for you.
Claiming Income Tax Refund
Any Pre-Bankruptcy and prior year income tax refunds can be claimed by the revenue agency to offset any money you owe. If you don’t owe anything, these refunds are paid into the bankruptcy for the benefit of your creditors or can potentially be used to cover the costs of your bankruptcy proceedings. Any refund you receive after the year you file bankruptcy will be paid directly to you.
Tax Filing Deadlines in Bankruptcy
Filing for bankruptcy does not alter the tax deadlines:
The deadline to file your taxes is April 30th
If you or your spouse or common-law partner are self-employed, the deadline extends to June 15th
The deadline to pay taxes is April 30th
Interpreting Tax Slips for Redeemed Assets
Sometimes, a Trustee may redeem an investment or other financial instrument in bankruptcy, leading to an income tax slip arriving around tax time. If you receive this, rest assured, you are not required to pay tax on this. This slip should be provided to your LIT and excluded when you file your return. If the revenue agency assesses you based on this tax slip, contact your LIT to rectify the situation.
Consumer Proposals and Personal Income Tax Returns
In the case of a Consumer Proposal, your LIT is not obligated to file any of your returns. However, the revenue agency will typically prorate any taxes owed based on the date you file your taxes.
For instance, if you filed your Consumer Proposal on October 1st, and you owed $2,400.00, the revenue agency will prorate any amount owing by 10/12 (months) so in the end, you will only owe $400.00.
Remember: This prorated process doesn’t happen automatically. You or your LIT will need to call the revenue agency to ensure the correct amount is prorated.
Each person’s financial situation is unique, and different debt relief options work differently. Discover how bankruptcies and consumer proposals handle tax refunds.
Need Help? Reach Out to Us
Bankruptcy is stressful, but you’re not alone. We’re here to help. Feel free to contact us and we’ll provide you with the information you need to make an informed decision.
