filing income tax return in Canada during bankruptcy

How Your Income Tax Return Is Filed During Bankruptcy

With another tax year in the books, I have recently noticed an increase in questions relating to personal income tax returns. I thought to myself “What a perfect topic for my next blog”. Hopefully, the following will be helpful in understanding how your tax returns are filed during Bankruptcy.

Different Types of Bankruptcy Income Tax Returns

  • The Pre Bankruptcy period. When an individual files from Bankruptcy the tax year is split into two periods. The first period, or the Pre-Bankruptcy period, covers everything from January 1 of the year you filed for Bankruptcy until the day before the date of your Bankruptcy.
  • The Post Bankruptcy period. The second period or the Post-Bankruptcy period covers the period from the day of your Bankruptcy until December 31st. For example, if you filed for Bankruptcy on June 1st, the Pre-Bankruptcy period would be from January 1st to May 31st and the Post-Bankruptcy period would be from June 1st to December 31st.

You are probably thinking, why would there be two tax returns in a single year? Well, the answer has to do with the dischargeability of the tax debt. As Pre-Bankruptcy tax debt is considered to have occurred before the date of your Bankruptcy, this debt is included in your Bankruptcy and is dischargeable once you’ve completed the Bankruptcy process.

However, as the Post-Bankruptcy debt would be considered new debt you are responsible for ensuring that this is remitted to the Canada Revenue Agency.

Protip: Be sure to provide your Licensed Insolvency Trustee (LIT) with your tax slips as soon as possible. Bankruptcy returns take longer to process by the Canada Revenue Agency. Getting them to your Trustee to file your return as soon as possible will guarantee that you do not have interruptions in any of your government benefits such as Child Tax Benefit, Guaranteed Income Supplement, and GST Credits.

Two Returns! How Can I File Two Returns?

According to section 22 of the Bankruptcy and Insolvency Act, a Licensed Insolvency Trustee (LIT) only has to file Pre-Bankruptcy income tax return and, if you have not done so, the prior year’s return as well. Although a LIT does not have to file your Post-Bankruptcy income tax return, at Chase & Associates, we file this return on your behalf. This keeps the Bankruptcy process as simple as possible and relieves the stress of you having to file a return.

I Haven’t Filed My Tax Return for Many Years

A Licensed Insolvency Trustee may choose to file all your unfiled income tax returns in order to capture any income tax refunds or GST tax credits that may become available for the estate. If no such refunds/credits are available it is unlikely that the LIT will file it for you.

Income Tax Refund

Any Pre-Bankruptcy and prior year income tax refunds can be kept by the Canada Revenue Agency to offset any money owed to them. If nothing is owed to CRA then the Pre-Bankruptcy, Post-Bankruptcy or prior year returns are paid into the bankruptcy for the general benefit of your creditors or can possibly be used to cover the fees of your Bankruptcy proceeding. Any refund you receive after the year you file Bankruptcy will be paid directly to you.

Filing Deadlines

Although you have filed for Bankruptcy there is no change to the tax deadlines:

  • April 30th deadline to file your taxes
  •  June 15 deadline to file your taxes if you or your spouse or common-law partner are self-employed.
  •  April 30th deadline to pay taxes

My LIT Redeemed an Asset but I Got the Tax Slip. Why?

Sometimes in a Bankruptcy, a Trustee may redeem an investment or other financial instrument, and an income tax slip may arrive around tax time. If you receive this, you are not required to pay the tax on this, and this slip should be provided to your LIT and excluded when you file your return. If the Canada Revenue Agency assesses you based on this tax slip, contact your LIT to have them rectify the situation. You should never have to pay tax on the money you did not receive

Personal Income Tax Returns – Consumer Proposals

When you file a Consumer Proposal your Licensed Insolvency Trustee is not obligated to file any of your returns nor does any refund get paid into the estate. In fact, the only difference when filing a Consumer Proposal is Canada Revenue Agency will typically prorate any taxes owing (and refund if tax arrears is owing) based on the date you file your taxes.

For example, if you filed your Consumer Proposal on October 1st, and you owed $2,400.00, the Canada Revenue Agency will prorate any amount owing by 10/12 (months) so in the end, you will only owe $400.00. However, this process does not happen automatically and you or your LIT will have to call the Canada Revenue Agency to ensure the proper amount is prorated.

Although we cannot speak for all LIT’s, at Chase & Associates, if you have any questions or concerns surrounding your income tax returns or amounts outstanding, we encourage you to contact our office. Speak to one of our experienced staff members and we will be more than happy to assist you in any way we can. At Chase & Associates “People Come First”.

Bankruptcies and Consumer Proposals are unique in how they deal with tax refunds. Find out how each of these debt relief options work.

Contact Us – We are Here to Help

We encourage you to reach out to one of our convenient locations. We will be happy to speak with you and provide you with the information you need to make a good decision.

Len Hiquebran, CPA, CA, LIT

After completing my articling at a local accounting firm, I spent some time working in industry as a controller of a logging company. Subsequently, I joined Derek L. Chase & Associates Ltd. in 2017 and began working in the insolvency field. In June 2020 I completed my studies and was granted a license by the Federal Government to be a Licensed Insolvency Trustee.