Question: In your article Why Doesn’t Anyone File Bankruptcy in Canada in January? you said: “When you go bankrupt, you lose your tax refund for the year of bankruptcy, and all prior years that are not yet received.”
I went bankrupt in July 2011 and provided my 2011 tax refund to the trustee, but now I’m being told that I also have to provide my 2012 tax refund because 3 months of my bankruptcy was in 2012.
This doesn’t seem to equate with your comments.
Answer: J. Douglas Hoyes, CA, CIRP, Bankruptcy Trustee, the author of that article, responds:
Your trustee is incorrect. Section 67 of the Bankruptcy & Insolvency Act states that:
67. (1) The property of a bankrupt divisible among his creditors …shall comprise
(c) all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year — or the fiscal year of the bankrupt if it is different from the calendar year — in which the bankrupt became a bankrupt,….
In simple terms, you lose your tax refund for the calendar year that you declared bankruptcy in Canada. Providing your tax information to your trustee for the year of bankruptcy is one of the duties you must perform to receive your discharge from bankruptcy.
In your case you declared bankruptcy in 2011, so you lose your tax refund for the 2011 tax year. Your trustee is required to file two tax returns for the year of bankruptcy:
- a pre-bankruptcy tax return, for the period from January 1 to the date of bankruptcy (July in your case); and
- a post-bankruptcy tax return, for the period from the date of bankruptcy (in July in your case) to December 31.
The trustee gets all refunds to distribute to the creditors.
If there is a balance owing on your pre-bankruptcy tax return, that debt is included in your bankruptcy.
If there is a balance owing on your post-bankruptcy tax return, you are required to pay the tax owing, since that is a debt that was incurred after the date of bankruptcy.
I would suggest you contact your trustee and ask why they will be taking your 2012 tax refund; it may simply be that you mis-understood their explanation of the pre and post bankruptcy tax return. If your trustee insists that you will lose your 2012 tax return (which won’t be filed until the spring of 2013), you should question them again, and ask them to provide support for their position (since the Bankruptcy & Insolvency Act clearly states otherwise).