Bankruptcy and Tax Debt
When you are sure just how much you really owe to Canada Revenue Agency (CRA) (formerly Revenue Canada) and have considered less serious solutions, your final possibility is to resolve your income tax debts in bankruptcy.
Solution 4: File for Bankruptcy
Bankruptcy can erase many of your debts and give you a fresh financial start. The good news is that you can include income tax debts in bankruptcy. However, bankruptcy is a drastic step and will seriously affect your ability to obtain credit for years afterward.
There are some special rules that deal with tax debts in bankruptcy. We recommend that you contact a Licensed Insolvency Trustee and ask him/her to review your situation and confirm that your tax liability will be discharged if you go bankrupt.
How to avoid future tax debt problems
To avoid the same problem in the future, it is important that you understand what got you into the situation you are currently in, where you owe money to Canada Revenue Agency.
If you owe taxes because you cashed in the last of your RRSPs to pay your debts, you won’t have those tax obligations in the future – because your RRSPs are gone.
On the other hand, if you are self-employed and do not have taxes taken off each paycheque, and then you owe money to CRA at the end of the year, you have a more fundamental problem. Your tax debts in a case of a bankruptcy can be discharged, but next year you will owe money again.
We recommend that, if you are self employed, you estimate how much you will owe for taxes, and then send one twelfth of that amount to CRA each month. That way, at the end of the year, when you file your tax return, you will have no accumulated tax debts.
If you have serious financial problems preventing you from simply paying your income tax bill, there are a number of possible solutions, and the choice is not simple. A Licensed Insolvency Trustee has the professional experience to help you make the best decision, and will give you your first consultation free of charge. Contact a trustee near you today.