What Happens to my Tax Returns and Tax Refunds in Bankruptcy?

When you declare bankruptcy in Ontario the trustee is obligated to file your tax return for the year that you file. Actually, the trustee will file two tax returns that year for you. The first will be for the Pre-Bankruptcy period or January 1st until the day before the date you file for bankruptcy. Any debt that you have with Canada Revenue Agency (CRA), at this point is included in the bankruptcy. The trustee will then file a second return called the Post-Bankruptcy tax return in the spring of the following year. This return covers the period from the day you file bankruptcy until December 31st of that year. If you owe CRA for the post return, it is considered a new debt and the bankruptcy cannot capture it.

Refunds are a different matter. The year you file for bankruptcy any refund from either the Pre or the Post Bankruptcy tax return is considered an asset of the bankruptcy and is sent directly to the trustee and will be distributed amongst your creditors when the bankruptcy is completed. This is the only year that this happens. However, if you are behind in filing your tax returns and the trustee files the outstanding returns for you as well as the one for the year that you file the bankruptcy, then you will forfeit all the refunds from those years as well. It is a good rule of thumb to always file your tax returns when they are due but if you are entitled to a refund it is always best to ensure that all outstanding returns have been filed before you file for bankruptcy to minimize your loss.

It should also be noted here that although income tax debt may be included in a Consumer Proposal, the trustee does not complete your tax return the year you file your proposal or for any other outstanding years. It is important that any outstanding returns have been filed before you submit your Consumer Proposal to your creditors for consideration. Canada Revenue Agency is notified of any and all insolvency files whether you owe them money or not. Also, unlike a Bankruptcy, you do not forfeit your refund when you file a proposal.

If you would like to discuss your unique situation or have any questions about your tax returns and tax refunds in bankruptcy, please contact an Ontario Bankruptcy Trustee.