One asset that is affected by a personal bankruptcy is income tax refunds. The law requires that Canada Revenue Agency (CRA) send the trustee income tax refunds for specific years so that the refund can be included in the proceeds available to the creditors.
Let’s consider three different periods of time:
Years prior to filing bankruptcy
If there are unfiled tax returns for years prior to your bankruptcy, your bankruptcy trustee will ensure that the tax return is filed with CRA. CRA will send the refund to your trustee. If there is an amount owing on the tax return, it becomes a debt that is dealt with as part of your personal bankruptcy.
Year that bankruptcy is filed
Any refunds for the year in which bankruptcy is filed are sent to your trustee from CRA.
There are two tax returns for this time period: a PRE-bankruptcy and a POST-bankruptcy tax return.
- The pre-bankruptcy tax return dates from January 1st to the date that you file bankruptcy. If there is a tax debt for this period it becomes part of your bankruptcy. If there is a refund, it is sent to the trustee.
- The post-bankruptcy tax return begins from the date of bankruptcy to December 31st of that year. If there is an amount owing for this post period, it will need to be paid by you because it is a new debt after bankruptcy was filed. If there is a refund, it will be sent to the trustee.
- Pre and post returns are filed by your bankruptcy trustee.
Years after bankruptcy filed
Any tax years after your bankruptcy has started are not affected by bankruptcy. If there is a refund for these years, you will receive it. If there is an amount owing for that year, you are required to pay that amount.
Canadian Child Tax Benefits will continue to be received by you as normal during a personal bankruptcy as they are considered to be part of your income and not an asset like a tax refund. This can apply to some provincial credits as well.
If you’re considering personal bankruptcy as a debt solution, contact a local trustee in bankruptcy to find out more about how your tax refunds might be affected.