Area of Law: Credit, Debt and Bankruptcy
Answer # 0270
What happens with my taxes and CRA benefits if I file for bankruptcy?Region: Ontario Answer # 0270
When you file for bankruptcy in Canada, Canada Revenue Agency (CRA) is automatically notified. Generally, any tax refunds will be turned over to your Licensed Insolvency Trustee (LIT) and made available to creditors, and any income tax owed will be cleared by the bankruptcy.
Income tax returns
There are generally four types of income tax returns that must be filed during the different stages of bankruptcy.
Tax return for the year immediately preceding the year in which you file bankruptcy
If an income tax return should have been filed for the year prior to the year of bankruptcy, and was not, your LIT must immediately file a return for that year.
For the year in which the bankruptcy was filed, your LIT must file a pre-bankruptcy income tax return from January 1st to the date of bankruptcy.
If you are going through bankruptcy, your LIT may also file in-bankruptcy returns to report income from any personal assets that are liquidated, such as RRSPs or assets from businesses that your LIT is winding up for the benefit of creditors.
A post-bankruptcy income tax return must be filed for the period from the date of bankruptcy to December 31st.
Income tax refunds
- refunds resulting from returns for the year immediately prior to bankruptcy, pre-bankruptcy, in-bankruptcy, and post-bankruptcy are considered to be the property of the estate in bankruptcy, and therefore will be sent to your LIT and made available to creditors.
- refunds from returns made after bankruptcy will be sent to you, unless there is a court order in place to have them sent to the LIT.
Income tax owing
Generally, income tax debts are unsecured debts and, as such, the debt is removed as a result of the bankruptcy. However, if there is income tax owed for tax years after you have been discharged from bankruptcy, you are required to pay it.
If you have filed for bankruptcy and are owed an HST rebate, it is considered part of the estate in bankruptcy, and therefore, CRA will send your rebate directly to your LIT.
In Ontario, however, if a dividend is available to creditors without taking the HST payment into account, you and not your LIT will receive the HST refund. For example, if there is more than $1,800.00 in your estate, the HST is returned to you.
Canada Child Benefit (CCB)
The Canada Child Benefit (CCB) is a federal, tax-free monthly payment made to eligible families to help them with the cost of raising children under the age of 18. The CCB might include the Child Disability Benefit (CDB) and any related provincial and territorial programs.
If you file for bankruptcy under the Bankruptcy And Insolvency Act (BIA), you will not stop receiving this benefit, however, you must include the CCB when calculating and reporting your household income. These monthly reports will determine whether you are considered to have surplus income, which in turn will impact how long you are in bankruptcy and how much you will be required to pay. For more information about surplus income payments, refer to topic #0272 What happens to my salary, and surplus income while I am bankrupt?
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