Bankruptcy and Tax Debt

It’s more common than you think: simple income tax debt can drive Canadian consumers and small business owners into insolvency. Tax bills can be large and unexpected, and the Canada Revenue Agency (CRA) can be ruthless. To top it off, CRA has powers of collection that are unavailable to other creditors.

When you are sure just how much income tax you really owe to CRA, and have considered less serious solutions (see our info on Consumer Proposal), your final possibility is to resolve your income tax debts with bankruptcy.

Filing for Bankruptcy

Filing for bankruptcy is never an easy decision, but by the time a consumer needs to consider this solution, they have already been through a great deal of stress. Bankruptcy should not be seen as a failure, but as a pro-active step towards a better future with reduced stress. Bankruptcy can erase many of your debts and give you a fresh financial start.

Bankruptcy is a serious step that will significantly impact your ability to obtain credit for a certain number of years after it is discharged. The good news is that you can usually include income tax debts in bankruptcy.

Does Bankruptcy Clear Income Tax Debt in Canada?

In most cases, income tax debt is treated similarly to other unsecured debt in a bankruptcy. When the bankruptcy is completed, the tax debt will be cleared along with other debts.

That being said, there are special rules that deal specifically with tax debts in bankruptcy. We recommend that you contact a Licensed Insolvency Trustee for a review of your situation. This is a good way to make sure you have explored all your options thoroughly, and at the same time you can confirm that your tax liability will be discharged if you successfully complete a bankruptcy.

How to Avoid Future Tax Debt Problems

To avoid debt problems in the future, it is important that you understand how you arrived at your current situation, in which you owe a great deal of money to Canada Revenue Agency.

Do you owe taxes because you cashed in the last of your RRSPs to pay your debts? This can’t happen again soon, because any remaining RRSPs will be liquidated in your bankruptcy.

On the other hand, if you are self-employed, you can easily find yourself with a tax debt at the end of the year. It is important to prepare for such an eventuality and to make sure that you make payments throughout the year.

We recommend that at the beginning of each year, self-employed individuals estimate the amount of income taxes they will owe (0ften based on the previous year) and then remit one twelfth of this amount to the tax authorities – even if the tax authorities do not require such frequent payments. Then, at the end of the year, tax time will actually be enjoyable as you will have minimal or no accumulated income tax debt. You might even receive a refund!

Finally, make sure you have realistic expectations concerning your lifestyle and your expenses (both household and business). When do we accumulate tax debt? When we don’t feel we can afford to pay it. Proper budgeting and business management can eliminate the monthly deficit that often contributes to serious tax arrears.

Professional Advice

If you have financial problems preventing you from simply paying your income tax bill when it comes due, there are many 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.

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