Income Tax Debt in a Bankruptcy or Consumer Proposal

December 6, 2013

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It’s not uncommon for people in financial difficulty to owe taxes to Canada Revenue Agency (CRA)—sometimes a significant amount of taxes. Many of these people are under the impression that nothing can be done about it, because tax debt is different from other debt and the CRA has special powers. This is only partly true.

Income tax is administered under federal tax laws. Those laws do grant CRA certain powers of collection other creditors don’t have, but tax debt itself is still an unsecured debt unless CRA has taken steps to take security – like placing a lien on your property. As such, your unsecured income tax debt will be discharged after you complete a bankruptcy or a consumer proposal.

Be aware that this is true only for tax debt that accumulates prior to filing for bankruptcy or making a consumer proposal. As soon as you file, the tax clock starts ticking again and you will be responsible for any taxes that accrue from that point forward. This means you’ll need to file your future tax returns on time and make sure that you stay up to date on your payments.

Also, if you file a consumer proposal, CRA will only consider it if your returns are up to date when the proposal is filed.

If there’s a tax refund coming to you for the year in which you file for bankruptcy (or any prior years), CRA keeps it and applies it to your outstanding tax debt.

If you’d like to find out more about your options where your tax debt is concerned, call us today to schedule a free, no obligation consultation: in Ottawa call 613-237-5555; out of town, call toll-free 1-800-517-9926 or book online now.

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