Tax Returns and Bankruptcy: Understanding the Process
When you’re navigating the complex waters of bankruptcy, one question that often arises is: What happens to my tax returns during bankruptcy? Bankruptcy and tax matters are intertwined, and understanding how they affect each other is crucial to navigating the process smoothly.
Part 1: The Split of Tax Returns
When you file for personal bankruptcy, the tax year in which you file gets divided into two separate tax returns: a pre-bankruptcy income tax return and a post-bankruptcy tax return.
Pre-Bankruptcy Tax Return
The pre-bankruptcy tax return covers the period from January 1st up to the date you file for bankruptcy. Any money owed to the Canada Revenue Agency (CRA) under this return will be included in the bankruptcy, along with any other unpaid balances from previous years at the date of your bankruptcy.
Post-Bankruptcy Tax Return
The post-bankruptcy tax return covers the period from the date you file for bankruptcy through to December 31st. Any balance owing from this return will be a new debt, separate from the bankruptcy.
Part 2: How Your Tax Returns are Handled
Your Licensed Insolvency Trustee will handle the filing of these returns, using the information you provide, such as T4 slips. This is done to separate any balances owed to the CRA.
Part 3: A Practical Example
Imagine you met with a Licensed Insolvency Trustee and decided to file for personal bankruptcy. You owe approximately $35,000 to CRA in personal income tax debt up to the last year you filed, which was 2019. You sign your official bankruptcy documents on July 10, 2021.
- The $35,000 owed up to and including the 2019 tax return is erased in your bankruptcy.
- Your Trustee files your 2020 income tax return which is overdue at the date you start your bankruptcy.
- The balance you owe to CRA from this tax return is $350 – this will be written-off as part of your bankruptcy.
- Your Trustee files your 2021 pre-bankruptcy tax return, covering January 1 to July 9, 2021.
- The balance you owe to CRA from this tax return is $100 – this will also be discharged as part of your bankruptcy.
- Your Trustee files your 2021 post-bankruptcy tax return, covering July 10 to December 31, 2021.
- The balance you owe to CRA from this return is $250 – this will NOT be written-off since it was money owing from after the start of your bankruptcy.
Part 4: What About Unfiled Tax Returns?
If you have unfiled tax returns from previous years, your Trustee will also handle these. The key thing to remember here is that any balances owed from these returns will be included in your bankruptcy.
Part 5: Dealing With Tax Debt
You might be wondering: if you claim bankruptcy, what happens to back taxes? The good news is that tax debts can be included in a bankruptcy in Canada. This means your tax debts can be eliminated when you file for bankruptcy, giving you a fresh financial start.
Part 6: Post-Bankruptcy Tax Responsibilities
After your bankruptcy, you will need to file and pay your taxes as usual. Any balances owing from tax returns for the period after your bankruptcy filing will not be covered by the bankruptcy.
Part 7: Find A Local Trustee
If you need help managing your bankruptcy and tax returns, consider reaching out to a local Licensed Insolvency Trustee. They can guide you through the process and ensure you meet all your responsibilities.
Part 8: Say Goodbye to Debt Stress
Bankruptcy can be a stressful process, but with the right guidance, you can navigate it effectively. By understanding what happens to your tax returns during bankruptcy, you can be better prepared to handle your financial future.
Part 9: Free Consultation
Many Trustees offer free consultations to discuss your financial situation and explore your options. This can be a great opportunity to ask questions and get expert advice.
Part 10: Conclusion
In conclusion, bankruptcy impacts your tax returns, splitting them into pre and post-bankruptcy returns. Understanding this process is crucial to navigating your bankruptcy effectively. If you’re unsure about anything, don’t hesitate to reach out to a Licensed Insolvency Trustee for help.
Understanding what happens to your tax returns during bankruptcy is crucial in managing your financial future. With the right knowledge and guidance, you can navigate this process effectively and move towards a debt-free life.
