Many people wonder what happens to their tax returns when they file personal bankruptcy. The tax year that you file for bankruptcy during will be split into two tax returns: a pre-bankruptcy income tax return and a post-bankruptcy income tax return. The reason for this is to separate any balances owing to the Canada Revenue Agency (CRA) – here’s how it works:
The pre-bankruptcy income tax return covers the period from January 1st up to the date you file for bankruptcy – any money owing to CRA under this return will be included in the bankruptcy, along with any other prior year balances not paid at the date of your bankruptcy.
The post-bankruptcy income tax return covers the period from the date you file for bankruptcy through to December 31st – any balance owing from this return would be a new debt, separate from the bankruptcy.
These returns, and other tax returns for years prior to the year of your bankruptcy may be filed by your Licensed Insolvency Trustee, using information you provide (ie. T4s, etc.).
After meeting with a Licensed Insolvency Trustee, you decide to file a personal bankruptcy. You owe approximately $35,000 to CRA in personal income tax debt, up to the year you last filed, which was 2019. You sign your official bankruptcy documents on July 10, 2021.
- The $35,000 owing up to and including the 2019 tax return is written-off in your bankruptcy;
- Your Trustee files your 2020 income tax return (which is overdue at the date you start your bankruptcy);
- The balance you owe to CRA from this tax return is $350 – this will be written-off as part of your bankruptcy
- Your Trustee files your 2021 pre-bankruptcy tax return (which covers January 1 to July 9, 2021);
- The balance you owe to CRA from this tax return is $100 – this will be written-off as part of your bankruptcy
- Your Trustee files your 2021 post-bankruptcy tax return (which covers July 10 to December 31, 2021);
- The balance you owe to CRA from this return is $250 – this will NOT be written-off since it was money owing from after the start of your bankruptcy. From this return forward, you will file and pay your taxes owing.
Read more about dealing with tax debt: Can tax debt be included in a bankruptcy in Canada?