How Are Tax Refunds Affected In A Bankruptcy?

Category: Personal Bankruptcy (12) comments

personal-bankruptcy-income-tax-returnOne 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.

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  1. Ashleigh

    My partner and I have been living together for less than a year. He is 11 months into a 21 month bankruptcy.
    We will likely be common law by the end of the tax year.
    I am disabled and receive a refund.
    Will that refund be sent to the trustee?

    1. Ted Michalos

      If you have not personally filed for bankruptcy then no one has a right to seize your tax refund. Unless you owe the government money yourself, it should be safe.

  2. Lauren

    My understanding is, that once a trustee is discharged from my bankruptcy, the bankruptcy file is closed and eliminates the debts permanently. This all took place and then I was diagnosed and qualified for the Disability Tax Credit for prior years, including the bankruptcy years. Are these refunds the trustee’s, even though me and the trustee has been discharged.
    Thank you

    1. J. Douglas Hoyes Post author

      Hi Lauren. This is a question you should ask your trustee, because they have the complete facts in your situation.

      In general, any tax refunds for any years prior to and including the year of bankruptcy are assets of the bankruptcy estate, and Canada Revenue Agency will send them directly to your trustee, even if you and your trustee have been discharged. It’s not something under the trustee’s direct control. CRA will send all prior year’s refunds directly to the trustee.

  3. Sue A

    I have a client who filed bankruptcy in 2014 the trustee filed his 2014 & 2015 taxes. My question is can I efile his 2016 tax return? He said his trustee told him he must mail it, is he right?


    1. J. Douglas Hoyes Post author

      Hi Sue. Yes, if the bankruptcy occurred in 2014, you should be able to efile his 2016 tax return.

      In the year of bankruptcy there are two tax returns filed (a pre and post bankruptcy return), and since CRA’s systems are not set up for efiling of bankruptcy tax returns at least one of those returns must be mailed to CRA, but for the years after bankruptcy e-filing is available, because they are returns for a full calendar year.

  4. Nicole

    Every year I would claim the disabilty tax credit for my dependant. I filled for bankrupty and canada revenue agency put that amount without my consent…did they have the right to claim that amount?

    1. J. Douglas Hoyes Post author

      Without full information of your situation I can’t answer that question. I would suggest you ask for a full explanation from your trustee, and/or ask CRA for an explanation of how your deductions were handled.

  5. Christine

    When we file for bankruptcy there is an amount calculated that we owe. Does any tax return go toward that amount? For example, my amount was approx $5000. My return was $1200. Will that $1200 be put toward the $5000? Thank you.

    1. J. Douglas Hoyes Post author

      Hi Christine. When you file bankruptcy, CRA sends your tax refund for the year of bankruptcy (and any prior years) to the trustee, and the trustee distributes any remaining funds to the creditors. Your trustee can explain the exact math in your situation, but in general, yes, a portion of your tax refund goes to the creditors.


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