The short answer, for most people, is yes you can declare bankruptcy on taxes owing. In fact, 50% of the people that file personal bankruptcy include some form of tax debt. It is usually personal income tax, but also includes HST, source deductions, as well as director’s liability for corporate tax debts. This applies to people that file bankruptcy and for people that file a consumer proposal. Canadian bankruptcy law doesn’t differentiate between tax debts and other kinds of unsecured debt.
The long answer is still yes, you can declare bankruptcy on taxes owing, with the following restrictions:
- If you have been charged under the GAARs (General Anti-Avoidance Rules , Section 245 of the Income Tax Act) or similar provincial legislation then the government has decided that what you have done is illegal – it wasn’t a matter of you not filing or paying your taxes, you deliberately set up a scheme to avoid taxes.
- If you deliberately transferred assets to another person prior to filing the government may raise a Section 160 of the Income Tax Act assessment against that person and pursue the asset and the other person for your debt.
Both of these things are quite rare – you have to go out of your way and deliberately break the law in order for the Canada Revenue Agency to use these tools to collect your taxes.
There are a couple of other things that you need to be aware of, should you file for bankruptcy and have a tax debt.
- If you owe in excess of $200,000 in taxes and this represents 75% or more of your total unsecured debt, you must appear in Court in order to obtain a discharge from bankruptcy. This particular scenario comes up in less than 1 out of every 100 personal bankruptcy cases. The normal outcome in Court is that you may be ordered to repay a portion of the tax debt – usually 10 to 20%, but the Court may order any amount it feels is “fair”.
- Any creditor, including the Crown, has the right to oppose a person’s discharge from bankruptcy. If this happens you must appear in Court and the creditor must make an argument as to why they feel conditions should be placed on your discharge. The most common condition is a requirement to repay some portion of your total debts (not just the debt of the creditor that opposes). In the most flagrant cases of improper conduct, the Court has the right to refuse to grant an Order of Discharge . If this happens all of your debts remain and your creditors’ rights to collect are re-instated. Again, this is very rare.
So, both the long and the short answers are yes to the question can you declare bankruptcy on taxes. For the majority of persons that have to file bankruptcy, their tax debt is treated just like a credit card, or personal line of credit. To be sure your tax arrears can be included in your bankruptcy we recommend you talk to a Local Bankruptcy Canada Trustee about your specific tax debts.