Income Taxes and Bankruptcy

Navigating Through Income Taxes and Bankruptcy in Canada

For many Canadians, the fear of owing money to the Canada Revenue Agency (CRA) can be a major source of stress. But what happens when you’re unable to pay your tax debts? The answer, surprisingly, may be bankruptcy. This article will delve into the complexity of Income Taxes and Bankruptcy, and its implications.

Understanding the Role of CRA

The CRA is not just another creditor. Their principal mandate is to collect due taxes from individuals and businesses in Canada. However, if you’re unable to fulfill your tax obligations, you may need to contemplate bankruptcy.

In Canada, declaring bankruptcy can eliminate your tax debts, provided the CRA hasn’t secured them through a lien before your filing. The tax debts that can be dismissed via bankruptcy include income tax, payroll deductions, and source deductions for HST or PST.


“Dealing with the CRA can feel like you’re up against a powerful adversary. But understanding how to navigate the system can make all the difference.”


The Power of the CRA

The CRA bears some unique powers that exceed those of an average creditor. These include:


  • Freezing your bank account or garnishing your wages without a court order.
  • Instructing your major customers (if you own a business) to pay them directly instead of you.
  • Registering a lien against your property without your consent or a court order.
  • Understanding these powers can help you prepare for what’s ahead and potentially avoid devastating consequences.


Can You Declare Bankruptcy on Taxes?

Indeed, you can. In fact, the CRA will not accept less than the full tax obligation owing unless you work with a Licensed Insolvency Trustee to eliminate your tax debt through the Bankruptcy & Insolvency Act.

Things to Consider When Filing for Bankruptcy

1. Insolvency

Bankruptcy should not be seen as an easy way out of paying debts. It’s a legal process designed to give Canadians a fresh start when they have no reasonable expectation of paying their debts in full.

2. File All Outstanding Tax Returns

The CRA will make your bankruptcy process more challenging if you have outstanding returns. They need to verify how much tax debt is owing to make a claim in the bankruptcy.

3. File All HST Returns (If You’re Self-Employed)

The CRA wants to establish the total amount owing and ensure compliance with filing requirements.

4. The CRA May Request Additional Information

This is particularly true if you’ve not made honest efforts to file your returns or make some form of payments before declaring bankruptcy.

5. Complete Your Bankruptcy Duties

The goal in bankruptcy is not just to file for it, but to be discharged from it. The debts are legally released only when you are discharged.

6. Complications with Large Tax Debts

If your personal tax debts exceed $200,000 and represent more than 75% of your unsecured debts, you’re not eligible for an automatic discharge. You will have to attend court and meet specific conditions to be discharged.

7. Lose Tax Refunds Up to The Year of Bankruptcy

Any refunds owing to you, up to the year you file, will be kept by the CRA or forwarded to the trustee as an asset of your bankruptcy.

8. Keep Tax Refunds After The Year of Bankruptcy

This knowledge can guide you on when to file bankruptcy if you’re expecting a tax refund.

9. Maintain All Taxes Current

This implies filing tax returns on time and making necessary installment payments.

10. Bankruptcy Will Not Remove a Pre-Existing Tax Lien

Filing for personal bankruptcy will not remove a CRA lien on a house. However, CRA may agree to remove the lien in a consumer proposal, provided your proposal is acceptable to them.

11. Bankruptcy Eliminates Most Forms of Tax Debt

If you own a business, you might have debts for unremitted GST, HST, or payroll deductions. Each situation should be carefully reviewed to ensure the specific tax debt can be discharged by bankruptcy.

12. Consider a Consumer Proposal as an Option

You can negotiate for CRA debt forgiveness by filing a consumer proposal, which provides the same creditor protection from CRA collection practices as a bankruptcy.

Declaring bankruptcy can, therefore, help resolve most tax debt situations. However, given the complexity and implications of Income Taxes and Bankruptcy, it’s advisable to seek advice from a Licensed Insolvency Trustee to understand your specific circumstances better.

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