Does bankruptcy clear tax debt in Canada? Several things in life are avoidable such as yard work or washing dishes. One thing that is almost impossible to avoid is tax debt. You cannot just walk away from your tax debts, you must clear them.
One very common question, is “does bankruptcy clear tax debt in Canada?” Do you have this same question on your mind? If you want to know the answer to this question, grab a seat and read to the end of this post.
Can you Declare Bankruptcy on Taxes?
The body in charge of assessing and collecting taxes in Canada is the Canada Revenue Agency (CRA). Unlike the regular creditor, the CRA has the power to collect money owed. Here are a few things that they can do:
- Freeze your accounts.
- Garnishee your wages.
- Send notices to your customers to pay money to them instead of your business.
- Register a CRA lien against your home if you own it.
Unlike a bank, they don’t need any special permission from the courts. Also, they don’t need your consent to do all of this. If you want to avoid all of this, then you should pay your tax debts. What if you can’t?
Can you declare bankruptcy on taxes? The common misconception is that personal bankruptcy doesn’t cover tax debts. However, tax debts are just as unsecured as credit card debts. As such, the CRA will eliminate tax debts when you complete your bankruptcy duties. To file bankruptcy on tax debts, you must satisfy the following conditions:
- You need to be insolvent.
- Every outstanding tax return must have been filed.
- You must have filed every HST return if you are self-employed.
- CRA may request extra information or a creditors’ meeting.
- Complete your bankruptcy obligations.
- There may be complications if the tax debts exceed $200,000.
These are some of the most important conditions to satisfy if you are looking to clear tax debts in Canada through bankruptcy. It is also important to note that bankruptcy cannot eliminate all kinds of tax debts in Canada.
What types of Tax Debt can Bankruptcy Wipe off in Canada?
So far, we have established the fact that bankruptcy can help to eliminate certain tax debts in Canada. Another question begs to be answered. What types of tax debts can bankruptcy wipe off in Canada?
As we mentioned above, bankruptcy will not get you out of all the tax debts in Canada. In this section, we have put together the tax debts that the CRA treats as unsecure. These debts are similar to credit card debts. As such, they can be entirely forgiven or written off or they can be reduced or without interest. The debts that fall under this umbrella include:
- Income tax debt.
- Business GST/HST debt.
- HST/GST Credit and overpayments on Canada Child Benefit.
- Penalties and interests accrued on the debts above.
When you file for personal bankruptcy, it stops the interest charges on the debts. Also, it helps to remove garnishments and bank account seizures. However, if your property or residence has been taken over by the CRA, bankruptcy cannot help to get them back. This is why we advise that you act promptly before the charges get registered.
Also Read: Trend against Trend Forex Trade
What Happens to your Tax Returns when you File Bankruptcy?
It is possible to file for personal bankruptcy if you haven’t filed your tax returns to date. In this case, the Licensed Insolvency Trustee handles the filing process. This will be based on the information that you provide. Also, the Licensed Insolvency Trustee files pre- and post-bankruptcy income tax returns on your behalf.
So what happens to your tax returns? We have outlined them below:
- The money that is owed before the year’s tax returns is included and forgiven. It doesn’t matter if it is filed before or after the filing of bankruptcy.
- You forfeit the tax refunds that you were entitled to receive prior to the bankruptcy filing. Your creditors become eligible to receive such monies.
How do I get out of Tax Debt?
No one wants to owe tax debts, especially when you consider what the CRA can do to you. While filing for bankruptcy is a great idea, why not seek to get out of tax debt completely? In this section, we have a few suggestions for you.
File your taxes, whether you can pay or not
Sometimes, you still have a balance when you are done with your calculations. Instead of neglecting such numbers or sweeping them under the carpet, file them. When you ignore them, you only make matters worse.
If you don’t file taxes and you are found out, you could face dire consequences. For example, there is a monthly penalty for not filing before the deadline. This makes your tax debt worse. If you need some extra time to file, simply apply for an extension. Filing helps you to know how much you need to pay and you can pay as much of it as you can. This helps you to avoid unnecessary penalties and interests.
Draw up a payment plan
If you are not able to pay your taxes within the stipulated time, there are several provisions to manage your balance. Below are some of your options:
- Speak to the authorities to get a suitable payment plan. Most times, these plans come with penalties or interests.
- Delay the payment but you must provide proof that paying the debt will hinder you from affording basic living expenses.
- Take the “offer in compromise approach.” This approach makes it possible to resolve your tax debt for less if you can prove that payment is causing your financial hardship.
Reach out to a Tax Expert
Your best option is to seek the assistance of a tax expert because handling tax debts can be quite tricky. Working with a CPA, financial planner, or accountant reduces complexities and makes your life easier.
Does bankruptcy clear tax debt in Canada? Yes, it does, if you go about it the right way. We have shown you what to do and also how to pay up your tax debts. Do you have any questions? Drop them in the comments section.