Special Guest Commentary by J. Douglas Hoyes, BA, CA, CIRP, CBV, Bankruptcy Trustee
I admit that it’s an exaggeration to say that “nobody” files bankruptcy in Canada during the month of January, but it is true that the number of personal bankruptcy filings is drastically reduced in January of each year.
According to statistics published by the Office of the Superintendent of Bankruptcy, in December, 2010 there were 6,699 personal bankruptcies filed in Canada. In January, 2011 that number dropped to 5,864, a drop of 12.5% in one month! Between December, 2010 and January, 2011 the number of consumer proposals filed increased by 3.8%.
A drop of 12.5% in one month is a huge number. That’s a drop of 835 bankruptcies in one month. If the bankruptcy numbers continued to drop by 835 each month it would only take eight months to eliminate all of the bankruptcies in Canada!
Perhaps the economy improves considerably every January? No, because if that was the case the number of consumer proposals filed would not be increasing.
So what’s going on?
When you go bankrupt, you lose your tax refund for the year of bankruptcy, and all prior years that are not yet received. Providing your tax information is one of your duties as a bankrupt.
If you go bankrupt in July, 2012, you lose your tax refund for 2012 (the year of bankruptcy).
If you go bankrupt in January, 2012, you lose your tax refund for 2012 (the year of bankruptcy), but you also lose your tax refund for 2011, because you haven’t filed it yet! In other words, if you file in January, you lose two years worth of tax refunds!
So here’s what you need to know:
If you are expecting a tax refund, it’s better to either go bankrupt in December (so you only lose one year’s tax refund), or wait until you have filed your tax return and received your refund, and then go bankrupt in April or May.
Of course if your wages are being garnisheed you may not want to wait three months to file, but if you have no garnishments or other reasons to file quickly, and if you are expecting a tax refund, it often makes sense to wait until you receive your refund to go bankrupt.
If you owe money to CRA, the timing is less important; you can file anytime.
If you do want to file quickly, a better option may be a consumer proposal, because in a proposal you don’t lose your tax refund.