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Taxes in bankruptcy and consumer proposal

Included in my bankruptcy was about $1200 to the government (Revenue Canada) for taxes I owed. My question is, once discharged (I know what happens with the 2 tax filings, I mean after that) if I were to get a tax return would I get to keep it or would they keep applying it until they had recooped all their funds?

Also my husband filed a proposal and included was about $10k of income tax owed. When he went to file a return and was due to get back about $1200, it was indicated by the person e-filing that he would not get it back and the government would keep it. Will they do that until they have fulled re-cooped in that situation?

So wondering if they will keep it and if there is any difference in that way between bankruptcy and a proposal?

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One Response to “Taxes in bankruptcy and consumer proposal”

A licensed trustee said...

You’ve really asked 2 questions – one about how taxes are handled in bankruptcy and the second asking how taxes are handled in a proposal.

If you file bankruptcy the date your bankruptcy starts causes a “deemed year end” for tax purposes. Your trustee will prepare a tax return from January 1st to the date your bankruptcy starts – this is called the PRE bankruptcy return.

If you owed income taxes before you filed bankruptcy and you are entitled to a refund on the PRE bankruptcy return the government may keep as much of the refund as necessary to pay-off your tax debt. If there is any refund left it will be paid to your trustee for the benefit of your other creditors.

A second tax return will be prepared from the day after your bankruptcy started until December 31 – this is called the POST bankruptcy return. If you owe money on this return you must pay it and if you are entitled to a refund it will either be sent to you or your trustee depending on the terms of your bankruptcy.

In a proposal there is no PRE and POST period unless you have specifically requested it as a term of your proposal. The government has always taken the view that if you are entitled to a refund for the year that you file a proposal the government has the right to take that refund if you owed them money when you filed the proposal. It is unclear if this is legal, but the government does it anyway and the Court has not been asked to rule one way or the other. The government will not continue to take any future refunds – this is clearly inappropriate and so if the government has taken a refund for the second year of a proposal you should contact your trustee and have them investigate further.