A bankrupt’s tax year is divided into two parts.  This is commonly referred to as the pre and post-bankruptcy periods.  If a consumer debtor files an assignment in bankruptcy, for example on May 1, then the tax year is divided into the period between January 1 – April 30 (pre-bankruptcy period) and May 1 – December 31 (post-bankruptcy period).  Even though there are two returns, it encompasses the entire taxation year.

In most cases, the Trustee prepares the income tax returns for both periods of time as it is fairly expedient to do so.  However, in the case of individuals who are self-employed or who have complicated tax matters, there is nothing in the Bankruptcy and Insolvency Act or the Income tax Act that requires the Trustee to actually prepare the returns.  The Trustee is responsible for ensuring that the returns for the year of bankruptcy and the prior year are done and filed, but that does not necessarily mean the preparation of those returns.

Who gets the refunds?

Any refunds that arise from the filing of the returns are automatically paid to the Trustee as property for the estate.  That would be any refund for outstanding years prior to the bankruptcy (assuming refunds are outstanding) and for the pre and post-bankruptcy return.  If there is a debt owing to the tax department and a return is filed that results in a refund, the tax department has the right to offset and debt owing against the refund.

What happens if there is a debt owing?

Any debt that is due for the pre-bankruptcy period and/or prior year’s returns is included in the bankruptcy.  It is a myth that taxes cannot be included in bankruptcy.

If a bankrupt has a debt owing to Canada Revenue Agency on the post-bankruptcy return, the bankrupt is responsible to pay that debt.  That is because the debt is based on earnings made after the date of bankruptcy.
In cases where the debtor is being deducted at source by their employer, any debt due on the post-bankruptcy return is typically very small.  However, in the case of self-employed debtors, sometimes the debt can be large.  In our practice, we encourage debtors to make monthly installment payments to the tax department to ensure that when their taxes are filed, there is no big surprise about owing a large debt.  As well, self-employed debtors are responsible to pay their own CPP.  So even if a self-employed debtor has not made a lot of money, they could still very well owe the tax department something on account of CPP on their self-employed earnings.

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And follow @askatrustee on Twitter

Yes they can.  The United States and Canada are parties to a Convention between Canada and the United States of America With Respect to Taxes on Income and on Capital.  In that convention is a section relating to collection of taxes under Article XXVI A of the Convention.  Both parties have agreed to assist each other in the collection of outstanding taxes to each.

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The Receiver intends to complete construction of the real estate development and list the units for sale.

A copy of the Notice and Statement of Receiver and the Court Appointment can be obtained by clicking on the link below.  For further information, please contact John McEown at (604) 605-3335 or at jmceown@boalewood.ca

Form 87 – Notice and Statement of Receiver
Court Appointment

One of the most important assets an individual has is his home.  People instinctively will do whatever they can to protect it for themselves and their family.  So what happens when the mortgage payments are missed and the lender starts a foreclosure proceeding?

The commencement of a foreclosure proceeding is usually a sign of deeper rooted debt problems.  It would be highly unlikely that a homeowner would stop paying their mortgage if they did not have other debt issues.  Most borrowers know when the mortgage payment is due and they will also know when they have missed their payments.  So, if you are going to miss a payment, what should you do?

Talk to your lender as soon as you know you are going to miss a payment.  Before any foreclosure starts, a borrower likely has more options of dealing with their debt than after the foreclosure starts.  A phone call to, or a meeting with, the lender to explain why you are going to miss a payment should be made.  Be prepared to provide full and frank disclosure of your financial situation.  As well, a lender may be more willing to provide some short term relief if they know your circumstances in advance.

The lender may be willing to work with you to make some form of accommodation such as a modification to your mortgage, interest only or deferral of payments until such time as you can start making the full monthly payments again.  The lender may also be willing to provide you with additional funding to get you through this temporary period.  Another alternative is to obtain a second mortgage provided you have equity available in your home to lend against.  However, do not borrow any additional funds unless you are sure you can pay them back.

The lender may be less willing or unable to make an accommodation after payments are missed and certainly after a foreclosure has been started.  A lender would almost always insist that any arrears and legal costs be paid before embarking on a revised payment plan.  Ultimately, the only thing that will stop foreclosure proceedings is repayment of the debt.  Everything else is only going to delay the inevitable, the sale of the property.  Therefore, if the lender is not able or unwilling to work with you, then you must explore other options.

So when the foreclosure papers arrive what should you do?

1. Immediately, contact a Licensed Trustee who can explain the options available to you with respect to dealing with your debt.  As previously stated, when a foreclosure is started, it is usually a sign of other financial problems. The Trustee will explain to you that bankruptcy is not the only option available and there may be a way of preserving some or all of your assets.

2. Co-operate with the lender or their agents during the showing of the property, keeping the yard clean and so forth.  There is a lot to be gained by cooperating with the lender during the foreclosure process.  If there is some prospect of any equity being available for the debtor, cooperation will assist in keeping the costs down and maximizing the sale price.

If the debtor does not cooperate and is an undischarged bankrupt, the Trustee is obliged to report conduct that is subject to censure, which could have an impact on the bankrupts discharge.

An assignment in bankruptcy or a proposal may free up sufficient funds in order for the debtor to meet their monthly mortgage payment (including property taxes and other attendant costs).  This is accomplished as the debtor would no longer be paying their other debts.  However, an integral part of the process is that the debtor must also budget to ensure that his monthly expenses can be met as well as any obligations he may have to the Trustee and his creditors.  Besides the possibility of being able to keep one’s home, this will allow an unfortunate and honest debtor a fresh start.

Reaffirmation of debt

One misunderstood aspect of bankruptcy is known as reaffirmation of debt.  When an individual declares bankruptcy and subsequently agrees to continue on with the mortgage payments, the effect is, in practical terms, a new contract that occurred after the date of bankruptcy.  If the debtor is unable to keep the mortgage payments current, and a subsequent foreclosure happens, the debtor will remain responsible for any shortfall that arises as a result of the foreclosure.  In other words, that debt will not be discharged by the bankruptcy.

Mortgage maturity or renewal

If an individual is bankrupt or has previously declared bankruptcy, there is a likelihood that there could be some difficulty renewing their existing mortgage or finding a new mortgage.  A lender may opt not to renew the mortgage, and if this is the case, the debtor will have to seek alternative financing and may end up with less favorable mortgage terms.  If the individual cannot qualify for a mortgage, bankruptcy or not, they are then faced with the possibility of selling their house.

Personal Exemption

In British Columbia, the Court Order Enforcement Act provides that an individual declaring bankruptcy is allowed to keep equity in a home located in the Metro Victoria and the Metro Vancouver areas to a maximum value of $12,000 ($9,000 for homes located elsewhere in the province).

When determining whether there is equity in real property, the Trustee must go through a process that is subjective and requires his or her professional expertise.  Firstly, if possible, a review of the title is helpful.  The Trustee can then use the assessed value of the property as a starting point to determine value and calculate what, if any, equity exists.  This is only a preliminary indication of value and has risks associated with it, particularly in a rising market.

After deducting the mortgages and the provincial exemptions, the Trustee then must consider what allowances should be made for selling costs (commissions and legal fees).

This is where the Trustee must use his or her expertise and balance that with the practicalities of realizing on real property while continuing to balance the interest of all parties.  This can be particularly difficult in a rising market, where the equity is marginal, where title is not in the debtors name only and so forth.

Regardless, a bankruptcy may be a way for an individual to preserve some of his assets through the exemption.

Conclusion

One cannot definitively say that when your house is in foreclosure that you should go bankrupt.  Generally though, it may be that your options are very limited at that point.  Any debtor facing financial difficulty should immediately seek the advice of a Licensed Trustee to determine what their options are, their rights and their responsibilities.

David Wood is one of the founding partners of the insolvency boutique firm of Boale, Wood & Company Ltd.  He can be reached at (604) 605-3335 or at dwood@boalewood.ca to discuss this article or any other insolvency matter.

Here is downloadable pdf copy of this article.

You may see advertisements from tax lawyers trying to scare you into believing that you need their services to deal with CRA debt, however; consulting with a Licensed Trustee may be a much better option for you. CRA isn’t looking to prosecute you; they are looking to collect money and a Trustee is usually your best option for dealing with debt.

Why use a Licensed Trustee instead of a tax lawyer? A Licensed Trustee can:

• Provide you with a full financial appraisal of your situation;
• Deal with all of your debts while a tax lawyer only deals with your CRA debt; the rest remains;
• Advise you on insolvency alternatives which include Division I proposal or consumer proposals , credit counseling and debt consolidation and, as a final option, bankruptcy;
• Provide immediate protection with a Stay of Proceedings by filing a Division I Proposal, Consumer Proposal or an Assignment in Bankruptcy;
• Advise what amounts are payable under the statute;
• Be less expensive than using a tax lawyer because in many cases the Trustee doesn’t charge a fee over and above what the Bankruptcy and Insolvency Act requires to be paid;
• Save you money because the actual amount required to settle using a lawyer may be higher than what debts could be settled for in a proposal or a bankruptcy;
• Offer you a free consultation while a tax lawyer usually requires a retainer.

There are a few cases in which you may want to consult a tax lawyer:

• Your debts chiefly or only involve CRA;
• You are not insolvent;
• CRA has registered liens on your property (bankruptcy does not always remove liens);
• Communication between you and your tax lawyer is privileged; a trustee must seek and make full disclosure;
•  You can avoid a bankruptcy filing and use the voluntary disclosure rules on all of your conduct and transactions;
• You are being prosecuted by the Department of Justice in relation to your tax reporting and therefore do require a lawyer.

If you’re experiencing serious debt issues, including tax problems with CRA, contact Boale, Wood & Company Ltd. at (604) 605-3335 for a no cost, no obligation consultation.  Call us now to make a fresh start.

** Inspired by my friends and colleagues at Ira Smith Trustee & Receiver Inc.

As CBC Vancouver producer Lisa Johnson put it:

The format is similar to a radio call-in show, but online, so people are typing rather than calling in. All the comments are pre-moderated…and our reporter will also be part of the conversation. We would like to have an expert on the system, to answer people’s questions about how it works, and what the current issues are for your profession.

I thought it was an interesting way to deal with issues.  However, it got away from the real story and was a little bit of trustee bashing.  One participant was really digging for info about trustees.  I smelled a set up and the producer did not post all of his questions.  It turns out he has a complaint about trustees.  But all in all, I really enjoyed the way it worked.  Would do it again in a flash.

Here’s a link the story – scroll down to bottom of the story in the section called Cover It Live to replay the online chat.

Yes.

If CRA has raised a Section 160 assessment against your wife then it is something she is going to have to deal with.  It is sometimes referred to as a memo assessment as the debt relates to any taxes owing by the bankrupt and subsequently also assessed against the recipient of the property.  Despite your bankruptcy and your discharge, it does not absolve her of this assessment. Any funds that CRA receives from your Trustee in bankruptcy would go to reduce the assessment against your wife.

Your wife should either talk to CRA directly to deal with this matter, obtain independent legal advice to see what her rights are or speak to a Trustee.

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If you owe your bank any money for anything then the answer is yes.

One of the unfortunate by-products of claiming bankruptcy or filing a proposal is that you usually need to sever your relationship with your bank if you owe them any money.  The debts could be for an overdraft, line of credit or even a credit card. We realize that changing banks can be stressful and cause some inconveniences, but in the long run, it will cause you less headaches.

Firstly, if you have any funds in your bank account, the bank has a right of set-off against those funds which means they can apply them to the loan.  Secondly, after the filing of a bankruptcy or a proposal, your account is likely frozen, so if you deposit funds in that account afterwards, you may have problems accessing them.  That may lead to some hardships by not being able to meet your obligations such as rent, food etc. and quite possibly, NSF fees.  To get those funds returned would then require the Trustee to intervene. Banks are large institutions and getting the money back takes time.

In my experience it is best to have a bank account with an institution that you owe no money to. Why take the risk of some major inconveniences for the sake of keeping that banking relationship. The inconveniences that can arise override the banking relationship.

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The effect of your bankruptcy on your house will depend on a couple of items.  If the house is solely in your wife’s name – then there is no effect, she continues the mortgage payments and keeps the house.  If the house is either jointly owned or 100% in your name, then in most cases you will be able to settle (pay) the Trustee your share of equity in order to retain the house.

The answer becomes more complex if you owe Canada Revenue Agency for taxes.  Make an appointment with us to review your situation in detail and explain how the process affects your assets.

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