What happens to pre-bankruptcy CTB’s?
If a person received a refund from Rev. Canada for retroactive Child Tax Benefits (while in bankruptcy) that were accured pre-brankruptcy are they obligated to report that amount to their current Licensed Insolvency Trustee? If so, are they then obligated to pay that amount, or a portion thereof, to their creditors? Is it deemed as “current income?”
This particular issue is a lot more common than you might think – many people fail to file their income taxes as required each year and when they finally do (as part of their bankruptcy) the government retro-actively sends out whatever Child Tax Benefits that the person may be entitled to.
Our approach to this issue is to give our clients a choice between 2 different ways to treat the retro-active cheque.
The first way is to treat the cheque as income in the month it is received and therefore it is subject to the Surplus Income Standard. The Surplus Income Standard requires bankrupts to pay a portion of their income into their bankruptcy based on the net monthly income received and the number of people in the household. Selecting this option means the person will lose 50% or more of the retro-active cheque.
The second way is to treat the cheque as an asset that the bankrupt was entitled to when they filed bankruptcy. Selecting this option means that the person will have to pay the entire cheque into their bankruptcy.
As you can imagine, no one has ever selected the second option.
Keep in mind that there is sufficeint basis in the law for either interpretation and your trustee may not agree with our policy of allowing a bankrupt person to decide which option they would like us to use. If you disagree with your trustee’s approach you should discuss the matter with your trustee and if it cannot be resolved you always have the right to ask the Courts to decide.