Business Income

Bankruptcy and Tax Return Filings

Bankruptcy and Tax Return Filings

Bankruptcy is a legal process that intends to alleviate insolvent individuals or businesses of most of their debts owed. However, filing for bankruptcy will affect the way in which a taxpayer files his income tax return.

Bankruptcy Trustee

Upon filing for bankruptcy, your trustee — a person typically appointed to represent your estate — becomes the administrator of your bankruptcy proceedings. They help you in your dealings with your creditors, Industry Canada, and the Canada Revenue Agency. They will also help you with any legal proceedings, including the filing of your bankruptcy tax returns, and may even provide you with additional services, such as debt counselling.

Tax Returns Filings

There are up to four types of income tax returns that you must file when declaring bankruptcy. These include:

  • the previous year’s tax returns (if you did not file it)
  • a pre-bankruptcy return
  • an in-bankruptcy return
  • a post-bankruptcy return

If you did not file a return for the year prior to the year in which you declare bankruptcy, your bankruptcy trustee should submit this return as soon as possible.

The tax year in which you declare bankruptcy is divided into three sections, as far as tax returns are concerned.

  1. A pre-bankruptcy tax return covers all of your tax items from Jan. 1 up to the day before your date of bankruptcy.
  2. An in-bankruptcy tax return covers any income from liquidated assets, along with information about any of your creditors who receive a payment resulting from your company’s liquidation.
  3. The post-bankruptcy tax return covers all of the tax items from the date of bankruptcy to Dec. 31.

All returns except for the post-bankruptcy return are to be filed by your bankruptcy trustee. You will be responsible for the filing of your post-bankruptcy return.

Tax Refunds

If your trustee submits any previously non-filed tax returns from previous years on your behalf and you are issued a refund from the Canada Revenue Agency, this refund becomes the property of your bankruptcy estate. As a result, it is delivered directly to your trustee.

Similarly, any refunds issued on your pre-, in- , and post-bankruptcy returns will be sent to your trustee. Any refunds issued to you in subsequent years will be delivered to you, as long as there is no court order in place to have them sent to your trustee.

Debt Discharges

Unfortunately, bankruptcy can only dismiss your unsecured debts, and leaves your secured debts simply as they stand.

  • Unsecured debts include credit card debt, payday loans, unsecured lines of credit, as well as any bills that are past due.
  • Secured debts, on the other hand, are loans that are tied to an asset, such as a house mortgage.

Additionally, bankruptcy relieves you of any income tax debt, both personal and business related.

Debts that are not included in bankruptcy remain the responsibility of the bankrupt person, and must be paid accordingly.