Who prepare the tax return?
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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