Tax Refunds and Bankruptcy in Canada

Tax Refunds in Canadian Bankruptcies

If you’ve recently filed for bankruptcy in Canada, you may be curious how this will be affecting your tax refunds.

While the legal jargon can be difficult to sift through, the process is straightforward.

What happens to my tax return when I file for bankruptcy?

A common misunderstanding about tax refunds is that once a bankruptcy is finalized, you will continue to receive any tax refund.

However, for the year you file bankruptcy, any tax returns will go directly to the trustee.

Your trustee will file two separate tax returns on your behalf:

 

  1. A pre-bankruptcy tax return;
  2. A post-bankruptcy tax return.

 

This is not over a period of longer than one year, which is a common misconception.

Instead, the pre-bankruptcy tax return falls from January 1st to the date you filed for bankruptcy.

The post-bankruptcy tax return comprises the date of your bankruptcy to December 31st.

Regardless of how much is returned, your trustee will be responsible for all of it and will distribute it to any and all creditors you owed.

In short, you will not receive your tax refund for the entire year during which you filed bankruptcy in Canada, even after you have been discharged from bankruptcy.

To be clear, one of the prerequisites of being discharged from your bankruptcy is to release your tax information to the trustee.

If you are unsure of the process of being discharged, you should be aware that the entire process of bankruptcy takes, on average, nine months to be fully finished and discharged.

You can learn more about bankruptcy discharge here.

Why don’t I receive my tax refunds?

When you file for bankruptcy, your tax refund that year is considered an asset of your bankruptcy estate.

This asset is no longer yours, and your post-bankruptcy tax refund is allocated to the trustee for the benefit of your creditors.

Will I receive next year’s tax refund?

Yes.

The only tax refunds that go directly to your trustee is the year that you filed for bankruptcy and any years you had not yet filed.

Any following years of taxes will allow you to receive your refund, and it will not go to your creditors or trustee.

If you have not filed a previous year’s tax return, you should do this prior to filing for bankruptcy to streamline the process.

This will also guarantee you receive the previous year’s tax refund, since it will have already been filed, and will no longer be considered an asset of your bankruptcy estate.

If you need to file for bankruptcy and have outlying questions regarding the process, reach out to the financial professionals at Bankruptcy Canada.

We can answer questions you may have, with a no-obligation discussion.

With multiple offices across Canada, our bankruptcy experts are fully knowledgeable about any bankruptcy questions regarding your province.

They can walk you through any questions you may have about joint filing taxes, any unfiled taxes from previous years, and help you understand the debt relief options that you have.

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