Understanding Tax Refunds and Bankruptcy in Canada
Navigating the complexities of tax refunds and bankruptcy in Canada can be a daunting task. This article seeks to demystify this process and provide a comprehensive guide on what to expect when filing for bankruptcy in the Great White North.
Concept of Bankruptcy
Bankruptcy is a legally declared inability of an individual or organization to pay their creditors. In Canada, this process is governed by the Bankruptcy & Insolvency Act.
Impact of Bankruptcy on Tax Refunds
When you declare bankruptcy in Canada, you forfeit your tax refund for that calendar year and all previous years not yet received. This implies that if you filed for bankruptcy in the year 2011, for instance, you would lose your tax refund for that year.
Understanding Section 67 of the Bankruptcy & Insolvency Act
Section 67(1) of the Bankruptcy & Insolvency Act provides a detailed breakdown of what constitutes a bankrupt’s property. It stipulates that any refund due to the bankrupt under the Income Tax Act during the calendar year of bankruptcy should be included in the property to be divided among creditors.
Responsibilities of a Bankruptcy Trustee
The trustee manages the bankruptcy process on behalf of the debtor. One of their key responsibilities is filing two tax returns for the year of bankruptcy: a pre-bankruptcy tax return for the period from January 1 to the date of bankruptcy, and a post-bankruptcy tax return, covering the period from the bankruptcy date to December 31.
Pre-Bankruptcy and Post-Bankruptcy Tax Returns
The refunds from both the pre-bankruptcy and post-bankruptcy tax returns are used to repay the creditors. However, any balance owed on the pre-bankruptcy tax return is included in the bankruptcy, while any balance owed on the post-bankruptcy tax return must be paid by the debtor, as it is a debt incurred after the bankruptcy date.
Debt Inclusion in Bankruptcy
It’s imperative to note that any debt accrued after the bankruptcy date is not included in the bankruptcy. This means that if you owe any tax on your post-bankruptcy tax return, you’re obliged to pay it.
Role of Creditors
The creditors play a crucial role in the bankruptcy process. They receive all refunds from the trustee, who distributes them according to the provisions of the Bankruptcy & Insolvency Act.
Misconceptions about Bankruptcy
Some common misconceptions about bankruptcy in Canada are that you may lose your tax refund for a year subsequent to the bankruptcy year. This isn’t true. The Bankruptcy & Insolvency Act clearly states that you only lose your refund for the calendar year in which bankruptcy was declared.
Questioning your Trustee
If your trustee insists that you’ll lose your tax refund for a year after your bankruptcy year, it’s important to ask for an explanation. If unsatisfied, you should request them to provide legal support for their stance.
Conclusion
Understanding tax refunds and bankruptcy in Canada is crucial in making informed decisions during financially challenging times. Always consult with a professional to ensure you’re getting accurate information and advice.
In the end, remember that bankruptcy isn’t the end of the world. It’s simply a financial tool designed to help individuals and businesses navigate difficult financial situations. With the right information and guidance, you can successfully navigate through this process and regain control of your financial future.
Remember, knowledge is power. Equip yourself with the right information and make the best decisions for your financial health.
