Bankruptcy Tax Implications
Many individuals and businesses are experiencing extreme financial difficulty and may be contemplating filing a proposal or bankruptcy under the Bankruptcy and Insolvency Act (Canada) (the “BIA”).
Debtors (especially those with tax debts) should be aware that there are issues that should be considered prior to filing under the BIA when one of the debtors is the Canada Revenue Agency (“CRA”).
Subsection 160(1) of the Income Tax Act (Canada) (the “ITA”) and section 325 of the Excise Tax Act (Canada) (the “ETA”) allows the CRA to go after individuals that are closely related to the debtor if there was a transfer or dissipation of assets. For example, if a tax debtor transfers her ½ interest in the family home to her husband, and the husband does not pay fair market price for the transfer, the CRA will go after the husband for the full value of the tax debt or transfer (whichever is higher).
Filing for bankruptcy or making a proposal under the BIA will not stop the CRA from assessing and taking collection action against related parties. If you are considering making a filing under the BIA and you are a tax debtor, you should seek legal advice from a tax lawyer on the potential exposure to you and individuals related to you. Remember that a Trustee in Bankruptcy acts for both the debtors and the creditors, while a tax lawyer only acts for you. The Trustee will be obliged to disclose information to the CRA regarding recent transfers of assets that a debtor has made to related parties.
Quantum of Debt
Tax debtors may determine that it is unnecessary to appeal their tax debts because they decided to file a proposal or a bankruptcy under the BIA; however, the total debt at the time of filing may have a significant impact on the duration of a bankruptcy or a proposal and the options available. Tax debtors should seek advice from a tax lawyer to review whether filing an objection or appeal in respect of a tax debt is necessary. Successfully reducing a tax debt prior to bankruptcy could reduce time spent in bankruptcy by many months or even years, reduce payments required to obtain a discharge at the end of the bankruptcy process, and, in some cases, allow an individual to make a Consumer Proposal (a cheaper and less risky process) rather than a Division 1 proposal under the BIA.
Trustees in Bankruptcy often request that you become tax-compliant before making a filing under the BIA. In this situation, legal advice from a tax lawyer may be helpful regarding meeting tax filing obligations and preventing new issues from arising, especially when there may have been previously unreported income, filing obligations from overseas income or assets, debt related to arbitrary assessments or audit results, and other more complex matters.
If you are considering a bankruptcy or proposal under the BIA, and you are concerned that any of the above issues apply to you, please call Milot Law for a free consultation at (416) 601-1002.