How Are Tax Refunds Affected In A Bankruptcy?


Category: Personal Bankruptcy (66) 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?

    Reply
    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.

      Reply
  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

    Reply
    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.

      Reply
  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?

    Sue

    Reply
    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.

      Reply
  4. Nicole

    Hi!
    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?
    Thanks

    Reply
    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.

      Reply
  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.

    Reply
    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.

      Reply
  6. Sylvia d.

    I am 5 months into my bankruptcy and am getting ready to file my taxes. I am common law and have been told I have to file my taxes together with my common law spouse as we have lived together for over 12 months. I’m wondering if the trustees will take the return my common law spouse is entitled to or if they will only take what I would get personally?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Sylvia. Your trustee will need both your tax information and your spouse’s income to file the taxes, but your trustee will not actually file your spouse’s taxes, and your trustee will not get your spouse’s tax refund. You only lose your tax refund this year, not your spouse’s. Hope that helps.

      Reply
  7. Tony

    Hi I have 2 months left in bankruptcy, I already had pre and post bankruptcy completed I had to do 21 months because of a Jeep payment so I only owe bankruptcy 800 dollars and I’m discharged. So I’m supposed to get a refund from taxes this year but it’s a hold on my refund because I’m not discharged from bankruptcy… will they send my refund to bankruptcy to pay off what I owe then send me out the difference? Thanks

    Reply
    1. Ted Michalos

      You need to speak to your trustee about this. Normally, any tax refunds for the second year of a bankruptcy are paid to you – not to your trustee for your creditors. If you want the refund to be paid to your trustee they will need to send something to CRA to have the funds redirected. This is not usually done.

      Reply
  8. Ashley R

    A couple years ago I filed for bankruptcy and have since been discharged. I recently unearthed a stack of lost medical receipts from that tax year. If I request a refile of my taxes for that year so I can claim these receipts, will I receive the refund, or will it be taken away even though I have been discharged from my bankruptcy for a couple of years?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Ashley. If there is a refund for a tax year before or during your bankruptcy, the refund will go to the trustee for distribution to your creditors. You can discuss this with your trustee to confirm the timing and dates.

      Reply
  9. Brenda

    A husband declares bankruptcy and trustee submits post bankruptcy taxes for income. Husband and wife separate in mid December and wife now doing taxes. Does wife need to include spouses income when completing her taxes and would she state separated or married but separated for less than 90 days?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Brenda. The separated spouse will file her taxes as separated, since that was her status at the end of the year. To ensure the taxes are filed correctly it would be prudent to consult with an experienced tax preparation person.

      Reply
  10. Andrew

    I noticed that last year when my trustee filed my pre/post bankruptcy tax returns, the refund was about double what I usually get when I file…. Obviously circumstances change from year to year somewhat, but would the larger refund be connected to the bankruptcy?

    Reply
    1. Ted Michalos

      It should not be – trustees file tx returns based o the information that you provide. I do know that last year CRA had a “bug” in their filing system that caused CRA to send larger than usual refunds. They are in the process of going back and cleaning them up. Unfortunately, CRA hasn’t fixed the bug so we expect the same problem this year…

      Reply
  11. Heather

    Hi there, I filed for bankruptcy in 2018 and was discharged after 9 months, the trustee did my taxes for 2017 and got my refund as well as my 2018 taxes, I know that they get my refund and I get my tax credits but my question is; will it take as long to process this year since this is the second time my taxes have been done by the trustee?

    Reply
    1. Ted Michalos

      If you filed in 2018 the trustee is required to file 2 tax returns for you, the PRE return (the part of the year before you filed) and the POST (the part of the year after you filed). These returns are processed by a subset of CRA officers and yes, they take much longer to be assessed. Sorry, but it is a function of the number of people CRA assigns to PRE and POST bankruptcy returns.

      Reply
  12. Tiwaz

    Car loan: 22,000
    Student Loan: 22,000
    Credit card debts: 13,000

    My life spiraled out of control in summer of 2018. I may be filing for bankruptcy pretty soon.

    My guess is that I will lose the car (Only way to get to work and home). And I was hoping to use my income tax return to get a used car for next year. Will that still be possible?

    Reply
    1. Ted Michalos

      If you maintain the payments on your car loan then you should be able to keep your car, if you want to. If you don’t want to keep the car then you may definitely include the car loan in a bankruptcy if you give them back the car. I suggest you find a licenced insolvency trustee in your area and give them a call. You have options, but you need to speak to someone to find out what they may be.

      Reply
  13. ewa l.

    I filed bankruptcy in April this year 2019. I did my taxes in july and it says my 2018 refund was sent to my trustee which was approximately 1800 My question is If i get discharged by the end of this year will my 2019 tax refund be also seized by the bankruptcy trustee or will i be able to receive it

    Reply
    1. J. Douglas Hoyes Post author

      If you file bankruptcy you automatically lose your tax refund for the year of bankruptcy, and all prior years. So if you filed bankruptcy in April 2019, you lose your tax refund for 2018 and 2019. So, for people expecting a tax refund, we generally recommend that you file last year’s taxes and get the refund before filing bankruptcy, so that you only lose your tax refund for one year, not two if possible.

      Reply
  14. Melinda Spearing

    Hi I have a common law spouse who is approved for the disability tax credit however I am the one who has to claim it and have been fighting for the funds because of my bankruptsy. I wrote to the superintendant and pleaded with them to not take his payment he had nothing to do with my bankruptsy and he has suffered so much due to his illness. I went in to the bankruptsy mentally ill I have not kept my end of the contract and they still refused. Now i am assuming I no longer have my trustee as yet I haven’t heard. I can not accept this we both are in dire need as neither of us are working. Is there other avenues to help us ?
    Thankyou

    Reply
    1. Ted Michalos

      If you failed to complete your duties during your bankruptcy to the point that your trustee closed your file then you can either (1) convince the trustee to re-open the file, or (2) apply to the Court for your discharge (you will likely need a lawyer to do this). The first question the Court will ask is whether or not you completed all of your duties… It is a mess, with no easy way to sort itself out. Eventually, to be discharged you will need to complete all of the required duties, then argue with the Court that the tax refund should not be taken. Sorry, there is no easy way to do this.

      Reply
  15. Jenny

    Hey Doug & Ted,

    My husband has just filed bankruptcy and I’m wondering about what happens to my tax returns. Is this considered surplus income for that month? I usually receive about $5000 on average back per year.

    Reply
    1. Ted Michalos

      The refund for the year you file for bankruptcy and any prior years will be sent to your trustee for the benefit of your creditors. This will happen no matter when you are entitled to the disability credit. If you wit until your bankruptcy is over and apply then, CRA will still send any refunds for the year you filed for bankruptcy and any prior years to your trustee.

      Reply
  16. steve m

    Was recently discharged, and afterwards filed 6 yrs back taxes. Received the GST portion of my return today. I thought it all went to trustee.

    Is GST return exempt or will I get lucky and receive the rest of it as well?

    Reply
    1. J. Douglas Hoyes Post author

      Generally GST is exempt, but it all depends on what is in CRA’s computer. Presumably any tax refunds will be sent to your trustee, so I would suggest confirming your CRA status directly with your trustee.

      Reply
  17. Gail D.

    Hello, I filed for bankruptcy December 2018. I have to do 21 months. If there is a refund on my taxes for 2019 will I get it or does the trustee get it. Also will the amount of allowed income go up for 2020. My mortgage was renewed so payments went up and insurance went up and money is getting tighter.
    Thank you

    Reply
    1. J. Douglas Hoyes Post author

      Hi Gail. As a general rule you lose your tax refund for the year of bankruptcy (2018 in your case) but not subsequent years, so you will likely receive your 2019 tax refund. The surplus income limits for 2020 will be announced around March 2020; your trustee can advise you of the specific numbers.

      Reply
  18. john

    yes I filled bankrupty and on my post tax return there was 13000 that came back to my trust will that be taken off the amount I was required to pay to the trust or do that go on the past debt I had before the bankruptcy

    Reply
    1. Ted Michalos

      Your post-bankruptcy tax refund is considered an “asset” that your trustee receives for the benefit of your creditors. It cannot be applied to any other amounts you may be required to pay for your bankruptcy. Unfortunately, that is not how the law works…

      Reply
  19. Tracy

    If I file bankruptcy for let’s say 15,000 and I apply for disability tax credit which a lump sum payment is 20,000 will the trustee give me the 5000 difference or they keep the full 20000?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Tracy. That’s a complicated question because it depends on the period involved, and the law keeps changing, so this is a question you should ask your trustee. If there is a chance that you will get a big tax credit a bankruptcy may not be necessary.

      Reply
  20. Andy

    We filed bankruptcy in September of 2018. Reading through the comments I understand that I will receive the tax refund when I file my 2019 taxes. Will I need to report this on my income statement and submit 1/2 of it if I’m over the allowable income amount?

    Reply
  21. Ash

    I claimed bankruptcy in June 2018, for the 9 months. However I have not been discharged, will I be allowed to claim my own taxes or will they take my income for years to come until discharge?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Ash. You should contact your trustee to find out why you are not discharged, and they can explain what will happen with your taxes. Typically the trustee files taxes for the year of bankruptcy (2018 for you), so typically you would file your taxes for 2019, but if you are not discharged you may have issues with CRA releasing your refund, so a discussion with your trustee is your first step.

      Reply
  22. jean l.

    Hi I claimed bankruptcy on September 2019 and my discharge will be September 2020
    If I start working after the tax return will i be cleared for 2020 tax refund when I file in February 2021

    Reply
  23. Karen Jane

    I’m a little confused at what time frame is considered “in-bankruptcy”. A trustee filed my friend’s 2018 tax return(s). This same friend has a discharge date of March 5, 2020 but his trustee is telling him to file his own 2019 income tax return. Is 2019 not considered “in-bankruptcy” for him?

    Reply
    1. J. Douglas Hoyes Post author

      The trustee files the tax return for the year of bankruptcy, not the year after filing, so since your friend filed in 2018, the trustee filed 2018, and your friend will file their own taxes for 2019.

      Reply
  24. Traci

    Hello. My daughter filed for bankruptcy in January 2019 and was discharged September 2019. Her trustee did her 2018 taxes and kept her refund but said she has to do her 2019 taxes. Does she get to keep her 2019 refund. Thank you

    Reply
    1. J. Douglas Hoyes Post author

      Hi Traci. You lose your tax refund for the year of bankruptcy, so since your daughter filed bankruptcy in 2019, she loses her tax refund for 2019, even though she is already discharged. That’s why very few people go bankrupt in January or February if they expect a big tax refund; they lose their tax refund for the previous year, because it hasn’t been filed yet, and for the current year (the year of bankruptcy). Often people will file their taxes, get the refund, and then go bankrupt in March or April. Of course waiting is not always an option; if wages are at risk of garnishment it may not be possible to wait until you get a tax refund.

      Reply
  25. Juliana

    My husband filedfor bankruptcy on Aug 2018, and got discharge on June 2019 , he did his 2020 income tax , who will get the refunds?

    Reply
  26. Magda

    Hi, my husband and I had bankruptcy in October 2018, the trustee made our taxes (pre and post bankruptcy 2018) so, I got the discharge 9 months after but, my husband has to pay until July 2020 to get his discharge. Now, we have to file our taxes together for 2019 and, we want to buy RRSP before March 01 to used in our tax return. Is it possible buy RRSP under my husband name?

    Reply
  27. Maria Dennhardt

    Hello,
    I filed for bankruptcy In Sept 2018 for 21 months. My last year taxes (pre and post bankruptcy 2018) were filed by my trustee, however I need to file this time for 2019. Will I be able to keep the refund (if i am receiving one) if I file my income tax and it is processed after my discharge date in June? Or will it go to my creditors regardless of when CRA receives it because I am in bankruptcy at the time of filing?

    Reply
    1. Ted Michalos

      Neither your creditors nor your trustee have a right to your 2019 refunds – unless you specifically signed a form giving it to them. If you had a debt with CRA before you filed for bankruptcy then CRA may not release your refund until you have been discharged. This is a CRA policy and there is nothing your trustee can do about it… If you had government debts that survive your bankruptcy (student loans for example) then your refund might be redirected to them. If you have any such debts you should call your trustee to discuss what may happen.

      Reply
  28. John Liebs

    Yes, I know that in the year of bankruptcy CRA sends any refunds to the trustee. But I live in Quebec and I spoke to the person in the Bankruptcy Division of Revenue Quebec and she stated that they always sent the refund cheque or direct deposit to the taxpayer; NOT THE TRUSTEE.

    So then , does the Trustee have any claim on my provincial refund and if so, how does he access the money ??

    Reply
    1. Ted Michalos

      Sorry John, but I am not familiar with Revenue Quebec’s policies and procedures. If they send a refund directly to you I suggest you contact your trustee and ask them if you are allowed to keep it, if you have to declare it as income on your monthly report, or if you are supposed to send it to your trustee.

      Reply
  29. John Liebs

    when determining the average of the first 7 months revenue while in bankruptcy, does the trustee take just the revenue or might he also include for example.. medical expenses and net it out?

    Yes, for monthly surplus calculations we know that medical is to be deducted but not 100% sure for the average of the 7 months.

    John

    Reply
  30. John Liebs

    it is well known that CRA sends any tax refund to the trustee for the year of bankruptcy.However, say for example your paperwork is prepared on February 1 2020. Your date of liberation should be 9 months hence (assuming a 9 month bankruptcy) October31. If such is the case, then November and December are post liberation. So then , why should the taxpayer receive a part of the pro rata refund (i.e. November/December?)
    That is the logic but is logic thrown out and the statute holds in a case like this?

    John Liebs

    Reply
  31. John Liebman

    it is well known that CRA sends any tax refund to the trustee for the year of bankruptcy.However, say for example your paperwork is prepared on February 1 2020. Your date of liberation should be 9 months hence (assuming a 9 month bankruptcy) October31. If such is the case, then November and December are post liberation. So then , why should the taxpayer receive a part of the pro rata refund (i.e. November/December?)
    That is the logic but is logic thrown out and the statute holds in a case like this?

    John Liebs

    Reply
    1. Ted Michalos

      Correct – the government has simply stated that any refunds for the year a person files for personal bankruptcy and any/all prior years will be paid to the trustee for the benefit of the person’s unsecured creditors.

      Reply
  32. Barbara E.

    I am in bankruptcy and will be discharged July 2021. Do I have to mail my taxes for 2020 or can I e file. Do you continue to get GIS payments if you are in bankruptcy?

    Reply
    1. J. Douglas Hoyes Post author

      Hi Barbara. These are questions you should ask your trustee, because they are most familiar with your file. In general, the trustee files your taxes for the year of bankruptcy, and you file your taxes for all future years, using the same method as everyone else, so e-filing is generally fine. Your income is not impacted by bankruptcy, so if you are eligible for GIS you would continue to receive them.

      Reply

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