Most trustees in bankruptcy, myself included, will tell you that you should file all of your outstanding tax returns before filing bankruptcy in Canada – but do you really have to?
The filing of income tax returns is required under the Income Tax Act. There is actually no requirement under the Bankruptcy and Insolvency Act (BIA) that states you must file all of your outstanding tax returns before you declare bankruptcy.
So why do most trustees make you do so?
The simple answer is to make sure you are able to be discharged from bankruptcy.
The BIA does require that a bankrupt file their tax return(s):
- for the year immediately preceding the year in which they filed for bankruptcy,
- and the year they actually file for bankruptcy.
If a person has a history of not filing their tax returns then the trustee’s concern is they may not file them during the bankruptcy. Failing to complete your duties during a bankruptcy, including filing your tax returns, can mean you will not be discharged from bankruptcy (released from your debts).
You will also want your tax returns filed to ensure you will have the co-operation of the Canada Revenue Agency (“CRA”) during your bankruptcy. If your tax returns have not been filed on a regular basis, you may have a significant tax liability and CRA may be one of your major creditors. If your outstanding tax returns have not been filed before you file for bankruptcy CRA is much more likely to request a Meeting of Creditors to demand that the outstanding returns be filed so they can determine how much you owe. If this happens your bankruptcy is effectively put on hold while everyone waits for you to file the missing returns.
So, do you have to file all of your outstanding tax returns before filing bankruptcy? Legally, no you do not, but practically speaking you’re trustee is going to ask you to and likely won’t accept your file until you do.
If you have outstanding tax debts, or suspect you may due to unfiled tax returns, talk to a local trustee in bankruptcy about your options. Bankruptcy may help you eliminate not only taxes owing but penalties and interest. You may also be able to arrange for a tax debt settlement through a consumer proposal. Contact a Bankruptcy Canada trustee in your area today.
What if its a 21 month term because of surplus income that has been dragged out to a third year. They take the refund from your taxes but where does that go? To creditors or towards the balance owing to the trustee??
Hi Amanda – when you file for bankruptcy you should only be losing the tax refund for the year you file and any previous years refunds prior to your filing you might have outstanding. You should not be losing the tax refund for any other year after your filing date unless you voluntarily signed your tax refunds over to your trustee. If you have signed over future years refunds, the money could be applied to any amount you are already supposed to pay. So, if you have a balance owing to the trustee it could be used for that. The way bankruptcy actually works is your trustee collects whatever amounts you are required to pay under the law (like surplus income), plus any voluntary amounts you have agreed to pay. At the end of the bankruptcy the trustee is paid their fee and then whatever is left is distributed to your unsecured creditors. I hope that helps – if you’re still confused give your trustee a call and ask them to explain it in greater detail.
What if you haven’t filed your taxes in 10 years, but believe your returns would be more than enough to pay off your debts? What happens to the remaining funds? Are they allocated back to bankruptcie?
If you file for bankruptcy any refunds you may be entitled to for the year you file and all/any previous years will be paid to your trustee. If after all of your fees and debts have been paid in full (plus 5% interest), any remaining money will be returned to you. If you think the refunds will cover the debts why wouldn’t you file them yourself and avoid the bankruptcy all together?