If you are in a situation of financial difficulty, insolvent (unable to pay the debts), one of the options available is to file bankruptcy. Filing for bankruptcy is a legal process that allows a person or business facing overwhelming financial difficulties to clear most of their debts and start fresh.
Bankruptcy Trustee:
Upon filing for bankruptcy, your trustee or Licensed Insolvency Trustee (LIT) — a person appointed to represent your estate — becomes the administrator of your bankruptcy proceedings.
A trustee performs various duties including, the performance of debt assessment, preparing and filing bankruptcy forms, dealing with creditors, the Canada Revenue Agency (CRA), and legal proceedings. The trustee also performs administrative duties including the collection of payments, distribution of funds to the creditors, and, in the end, issuance of a discharge certificate (eliminating all your obligation to repay).
When you file for bankruptcy in Canada, the CRA is notified. Generally, any tax refunds will be sent to your trustee/LIT for settlement to creditors outstanding, and any income tax owed.
Tax Returns Filing Requirements:
The year when you declare bankruptcy, the following returns must be filed:
- The previous year’s tax returns: If you did not file a return for the year before the year in which you declare bankruptcy, your bankruptcy trustee should submit this return as soon as possible.
- A pre-bankruptcy return: from January 1 up to the day before your date of bankruptcy. The trustee submits the return.
- An in-bankruptcy return covers any income from liquidated assets, along with information about any of your creditors who receive a payment resulting from your company’s liquidation. The trustee submits the return.
- A post-bankruptcy return covers all income from the date of bankruptcy to December 31. You need to file it.
Tax Refunds:
If the trustee submits any previously non-filed tax returns from previous years on your behalf, and you are issued a refund from the CRA, the refund becomes the property of your bankruptcy estate. Therefore, a refund (if any) is sent directly to the trustee for adjustment of liabilities.
Similarly, any refunds issued on your pre-bankruptcy, in- bankruptcy, and post-bankruptcy returns are sent to your trustee.
Any refunds issued to you in subsequent years will be delivered to you, provided that there is no court order in place to have them sent to your trustee.
If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. We serve clients from Mississauga, Toronto, Brampton, Milton, Hamilton, Oakville, and across GTA. And if you find this post helpful, please let us know in your comments.
Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.