High Personal Income Tax Debtors and Bankruptcy

Surprise, surprise: The Federal Government’s laws make your life difficult if you don’t pay them.  In this case, its s172.1 of the Bankruptcy and Insolvency Act.

The majority of bankrupts never have to attend court, or appear before a judge, but this isn’t the case for “High Personal Income Tax Debtors” who have more than $200,000 of personal income tax debt that represents more than 75% of their total unsecured debt. (Mortgages, and most car loans are secured debt, not unsecured debt).
If your personal income tax debt causes you to be considered a “High Personal Income Tax Debtor” then the Licensed Insolvency Trustee is required to oppose your discharge and request a discharge hearing before an Associate Justice.

The Licensed Insolvency Trustee will notify the Department of Justice who will act on behalf of the Canada Revenue Agency (CRA).  They will attend your discharge hearing, and make submissions to the court.  Representatives of the Office of the Superintendent of Bankruptcy may also oppose your discharge and possibly attend your discharge hearing depending on your circumstances.

The judge may grant a Refused, Suspended, or Conditional order of discharge.

Having your application for discharge refused is the worst.  It’s like having the court say “try again later.”

Having your application suspended is better than being refused as the court provides a timeline for when you’ll receive your discharge and complete your bankruptcy.  Suspension periods vary, and are based upon a number of factors including the amount of tax debt, amount of total debt, and if you have been bankrupt or made a consumer proposal in the past.

If a conditional order of discharge is granted, then you’ll have to fulfil the conditions stipulated in the court’s order before receiving your discharge.  Common conditions are repaying a portion of your tax debt, and/or becoming compliant with the Canada Revenue Agency (CRA) in the post-bankruptcy period (i.e., filing your taxes, making income tax instalments, etc.).

The takeaway is that your discharge from bankruptcy won’t be smooth if you are considered a “High Personal Income Tax Debtor”.  That’s not to say that High Personal Income Tax Debtors can’t benefit from making an assignment in bankruptcy, but rather that they’ll have an additional hurdle to overcome before their tax debt is discharged.

These rules do not apply to Consumer Proposals, or tax debt other than personal income tax debt such as HST payable.

If you’re dealing with tax debt then give us a call.  We provide free consultations in which we review your situation, and explain your options to you.  Get a free, professional opinion, and make an informed decision about dealing with your debt.  Give us a call.  You’ve got nothing to lose except your debt!