If your financial debts have become insurmountable, in some cases, declaring bankruptcy is the best solution.
However, there are several misconceptions and questions about just which debts are eliminated by doing so. In particular, the status of tax debt, which plays a role in nearly half of all Canadian insolvencies, is often unclear. Here’s what you need to know about back taxes and declaring bankruptcy.
BANKRUPTCY ERASES TAX DEBT, BUT…
First, you should know that bankruptcy will, in fact, eliminate tax debt. If you have less than $200,000 in income tax debt, it’ll be automatically discharged. However, if you owe more than $200,000 and the amount represents greater than 75 percent of your total debt, you’ll have to speak with a licensed insolvency trustee (LIT) to navigate the discharge process.
There’s a catch, however. Tax debt is unsecured debt, which means it isn’t attached to collateral (like a mortgage is attached to a house, for example). However, the Canada Revenue Agency (CRA) can place a lien on your debt, thus turning the sum you owe them into a secured debt, which will not be discharged by bankruptcy.
HOW BANKRUPTCY ERASES TAX DEBT
The process starts with filing any and all tax returns you haven’t filed. This is necessary to confirm that you do owe money to the CRA, and exactly how much. Then, your LIT will want to check whether the CRA has taken action to recover the money from you, such as freezing your bank accounts or putting a lien on assets such as property. A bank account freeze will be lifted by bankruptcy, but not the lien.
NOT ALL TAX DEBT IS THE SAME
It’s important to understand that the CRA will treat you differently depending on your case. If you file your taxes on time every year and still can’t make payments, they’re likely to be more understanding than if you often file late or not at all.
Furthermore, don’t hesitate to consult an LIT to review your options. Sometimes a consumer proposal can be submitted to the CRA and is a better course of action.
CONTACT A LIT AS SOON AS POSSIBLE - CALL D. & A. MACLEOD COMPANY TODAY!
Whatever you do, if you owe back taxes and are unable to pay them, don’t wait to take action. The CRA can move much faster than private creditors when they’re owed money. At D. & A. MacLeod Company Ltd., we make it our mission to help you find your way to financial independence. Contact us today to make an appointment for a free consultation.