Bankruptcy is an arduous process that can have significant implications on various aspects of one’s financial life, including taxes and CRA benefits. This article aims to provide comprehensive information on the impact of bankruptcy on your taxes and CRA benefits.
Declaring Bankruptcy: An Overview
Before delving into the specifics of how taxes and CRA benefits are affected by bankruptcy, it’s necessary to understand the concept of bankruptcy. Bankruptcy is a legal proceeding that provides relief to individuals and businesses that are unable to meet their financial obligations. It entails surrendering certain assets to a Licensed Insolvency Trustee (LIT) in return for the elimination of debts.
How Bankruptcy Affects Your Taxes
When you declare bankruptcy, the Canada Revenue Agency (CRA) is immediately informed. Consequently, any tax refunds due to you are generally redirected to your LIT and distributed to your creditors. Conversely, any income tax debts you owe are typically cleared by the bankruptcy.
Income Tax Returns During Bankruptcy
During bankruptcy, there are four types of income tax returns that must be filed:
- Pre-Bankruptcy Tax Return for the Previous Year: If an income tax return should have been filed for the year before the bankruptcy and wasn’t, your LIT must promptly file a return for that year.
- Pre-Bankruptcy Tax Return for the Bankruptcy Year: For the year in which the bankruptcy is filed, your LIT must file a pre-bankruptcy income tax return covering January 1st to the date of bankruptcy.
- In-Bankruptcy Tax Return: The LIT may file in-bankruptcy returns to report income from any personal assets liquidated, such as RRSPs or assets from businesses that your LIT is winding up for the benefit of creditors.
- Post-Bankruptcy Tax Return: A post-bankruptcy income tax return must be filed for the period from the date of bankruptcy to December 31st.
Income Tax Refunds During Bankruptcy
Refunds resulting from returns for the year immediately prior to bankruptcy, pre-bankruptcy, in-bankruptcy, and post-bankruptcy are considered the property of the estate in bankruptcy. They are sent to your LIT and made available to creditors. Refunds from returns made after bankruptcy are sent to you, unless a court order instructs them to be sent to the LIT.
How Bankruptcy Affects Your CRA Benefits
Bankruptcy can also impact your CRA benefits. Here’s how:
HST Rebates
If you’re owed an HST rebate when you file for bankruptcy, it is considered part of the estate in bankruptcy. Therefore, CRA will send your rebate directly to your LIT. However, in Ontario, if a dividend is available to creditors without considering the HST payment, you and not your LIT will receive the HST refund.
Canada Child Benefit (CCB)
The Canada Child Benefit (CCB) is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18. If you file for bankruptcy, you will continue to receive this benefit. However, you must include the CCB when calculating and reporting your household income. This information is used to determine whether you have surplus income, which can affect the duration of your bankruptcy and how much you need to pay.
Getting Help with Bankruptcy
Filing for bankruptcy is a serious and complex process. Therefore, it’s crucial to get help from professionals such as a lawyer or a competent agency experienced in debt solutions. They can help you understand all your options and guide you through the process, ensuring you make the best decisions for your financial future.
In conclusion, bankruptcy will inevitably impact your taxes and CRA benefits. Understanding these effects can help you make informed decisions and prepare for the financial implications. If you’re considering bankruptcy, it’s crucial to consult with a financial advisor or lawyer to navigate the process and minimize the impact on your financial life.