RRSPs and Income tax returns
I went bankrupt, went through the nine months period, and now i am paying back a pre-determined amount, based on suplus income, and approved by a judge. Once i pay this back, i will be fully discharged. most of my debt was GST and income tax, which i did not pay regularly when i was self-employed.
i have started buying RRSPs to reduce my income tax. my plan is to take the return from investing RRSPs. and apply it towards my bankruptcy debt. if i get a return this year, will income tax keep it? it occurred to me it may be better to double up my payments to the trustee to clear the insolvency, and worry about RRSPs later.
Thanks for the advice.
Whether or not you get to keep your tax return partially depends on when you filed a bankruptcy. I am assuming you filed for bankruptcy some time in 2005. If so, you would have lost any refunds for the year of bankruptcy, but in most circumstances any tax refund that would relate to 2006 would be yours to keep.
As for your RRSP strategy, there is nothing inherently wrong with this idea, however, there is a risk associated with this. The risk relates to a category of the Bankruptcy and Insolvency Act (BIA) that “After Acquired Property.†Essentially, when you assigned yourself into bankruptcy you gave the right to your trustee to use all existing and after acquired property as outlined in the BIA to divide amongst your creditors in exchange for a remission of your unsecured debt. So the risk is that a creditor may see the presence of these RRSP’s and request the Trustee to liquidate this asset and divide it among the creditors. Realistically I doubt this will happen, but there is always the risk that it will.
While it is safer to concentrate on repaying the court ordered surplus, if you still prefer the other method, contact your trustee, outline your strategy and see if he will have any problems with you doing this.