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Does Bankruptcy Clear Tax Debt In Canada

Opposition To Bankrupt’s Discharge By The Trustee And A Creditor Court/osb No: 32

What debts are discharged by bankruptcy in Canada?


A second-time bankrupt closed his autobody shop business and became a tow-truck driver for his brother’s company. His brother had taken over the bankrupt’s autobody shop leases for equipment and the premises. The bankrupt did not disclose to the trustee his half ownership in the family home, nor did he identify as creditors the holders of three mortgages against it. He also did not report the entirety of his income. The bankrupt had served jail time and, with money borrowed from his brother, had paid $50,000 in restitution for fraudulently selling leased equipment worth $400,000. At the time of his application for discharge, the bankrupt had surplus income of $1,000 a month.

The decision to oppose the bankrupt’s discharge was based on a number of factsFootnote 1 including:

  • Bankrupt did not keep proper books and records for the business.
  • Bankrupt has been guilty of any fraud or fraudulent breach of trust.

Court decision

While the bankrupt argued that he had already been punished for his crimes, the Court responded that his bankruptcy was a separate issue. The Court refused to grant a discharge to the bankrupt. In addition, before he could reapply for discharge from bankruptcy, the bankrupt was required to either give his defrauded creditors information for recovering their equipment or pay 100 cents on the dollar for their proven claims. The Court further reminded the bankrupt of his ongoing surplus income obligation while he remains undischarged.

Who Can File For Bankruptcy In Canada

You can file for bankruptcy in Canada if you meet the following criteria:

  • You are a resident of Canada OR you do business in Canada OR you own property in Canada
  • You owe more than $1,000
  • You are unable to pay your bills when they come due
  • To , youre required to meet in person with a certified Trustee and have her submit the necessary legal documents with the government. Its up the Trustee and you to decide if bankruptcy is the best solution since there is no kind of approval process to go through outside of meeting these criteria.

    Can A Tax Debt Be Forgiven

    In Canada, tax debt is not forgiven. The CRA expects to receive the money that it is owed in full. In the eyes of the agency, this is money that is owed, and they expect to receive it in full. To ensure that taxpayers pay what they owe, the agency has a wide variety of collection powers and tactics that it uses to enforce compliance and get people to pay tax debts. To convince people to pay as soon as possible, the agency has is the ability to charge interest and penalties on outstanding taxes.

    If you do not pay your taxes on the day they are due, the CRA begins to charge compound daily interest on the outstanding balance. The interest rate charged can change every three months and the CRA posts the current rate on its website. As you can imagine, if you owe a large amount of tax debt, the interest can be very costly. Since interest is charged daily, the longer you go without paying your taxes, the more you owe. This can be a serious problem for many people and a big reason why taxpayers seek relief.

    As you can see, not only is there no CRA debt forgiveness, but the agency can and will take significant action to collect what it is owed.

    If you owe a large amount of tax debt, its important that you have your situation resolved properly and promptly. At Farber, our team has a proven history of successfully negotiating with the CRA to solve tax issues.

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    The hardest thing to understand in the world is the income tax. said Albert Einstein.

    We think what Einstein should have added to this sentiment is that taxes can also be one of the most stressful scenarios to deal with. For many of us it can feel like there is no relief from tax debt, as paying back tax debt can be financially and emotionally draining. Not only can it lead to interest charges and penalties, but the Canada Revenue Agency can garnish wages, freeze bank accounts and place a lien on your property in an effort to collect tax debt owed.

    How To Negotiate With The Cra

    Does Bankruptcy Clear Tax Debt in Canada?

    You may be able to explain your financial situation to CRA and try to negotiate a payment plan. For example, if you owe $1,000, you may offer to pay $100 per month for the next ten months. But, even if the CRA accepts your payment arrangement, you will continue to be charged penalties and interest until your debt is paid in full. Even if you come to an arrangement with CRA, they have the ability to rescind or modify this arrangement. If youre unable to successfully negotiate terms, the CRA may withhold tax refunds and GST credits, garnish your wages or accounts receivables, take funds from your bank account, and even place a lien on your home or other real property.

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    Does Bankruptcy Clear Income Tax Debt In Canada

    In most cases, income tax debt is treated similarly to other unsecured debt in a bankruptcy. When the bankruptcy is completed, the tax debt will be cleared along with other debts.

    That being said, there are special rules that deal specifically with tax debts in bankruptcy. We recommend that you contact a Licensed Insolvency Trustee for a review of your situation. This is a good way to make sure you have explored all your options thoroughly, and at the same time you can confirm that your tax liability will be discharged if you successfully complete a bankruptcy.

    Can You Go To Jail For Not Paying Your Taxes In Canada

    Canadians can potentially receive prison time for various tax offences. These include purposely providing a false or deceptive statement on a return, willfully attempting to evade taxes, destroying or altering records, or other such situations. You could also be faced with criminal tax evasion charges if you commit fraud or wilfully claim credits or refunds that you are not legally entitled to receive. In general, if you intentionally break or ignore Canadian tax law, you could face criminal charges and possibly jail time for tax evasion.

    Examples of tax evasion include not reporting foreign assets or income from foreign sources, participating in illegal tax schemes, deliberately making false statements or misrepresenting your financial situation, and other similar situations. All of these examples could potentially result in criminal charges and prison time for tax evasion.

    However, in the majority of cases, people who owe the CRA money do not wind up in jail. That said, even if jail time is not likely, that doesnt mean the CRA cant punish you significantly if you do not pay your taxes. The CRA has incredibly strong powers and, unlike most other creditors, they can take collection action against those who owe debt without getting a court order.

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    How Long Does Bankruptcy Last In Canada

    If youre on a first bankruptcy then youll be automatically discharged after nine or 21 months depending on whether youre making surplus income payments. For those on a second bankruptcy, this process is a little longer at either 24 or 36 months. This also depends on if youre making surplus income payments.

    Debts You’ll Still Have To Pay

    How to get rid of tax debt with the C.R.A – Tax Tip Weekly

    These include:

    • magistrates court fines
    • any payments a court has ordered you to make under a confiscation order, for example, for drug trafficking
    • maintenance payments and child support payments, including any lump sum orders and costs that have arisen from family proceedings, although you may be able to ask the court to order that you don’t have to pay this debt
    • student loans from the Student Loans Company
    • debts you owe because of the personal injury or death of another person, although you might be able to ask the court to order that you don’t have to pay this debt
    • social fund loans

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    Can I File Bankruptcy On Tax Debt

    You may be able to file bankruptcy on some types of tax debt. For instance, you may be able to discharge income tax debt if certain conditions are met .

    Note that you will need to pass the means test to qualify for a Chapter 7 bankruptcy in the first place. The means test compares your disposable income to the state median income for your household size. If your income is too high and you can’t pass the means test, you can file for Chapter 13 instead and develop a plan to repay your debts over the course of a few years.

    Myth Busting: Cra Debt Forgiveness And Cra Debt Relief

    Sorry, there is no such thing as CRA Debt Forgiveness, But that doesnt mean theres nothing you can do to avoid getting your wages garnished, your bank account is frozen or assets seized. We can help you deal with the CRA.We can help you deal with CRA tax debt and find tax relief.

    Home » Myth Busting: CRA Debt Forgiveness and CRA Debt Relief

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    Opposition To Bankrupt’s Discharge By The Trustee And The Osb Court/osb No: 31


    The bankrupt admitted to knowing that he was in financial trouble at least two years before declaring bankruptcy. However, in the year or so before declaring bankruptcy, the bankrupt applied for and obtained two more credit cards on which he accrued an additional $52,900 of debt. The bankrupt acknowledged that he provided false financial information to obtain credit. Also, the bankrupt stopped paying his creditors 11 months prior to declaring bankruptcy. One month later, he used his new credit card to travel abroad, spending $3,000 for the flight and $20,000 to purchase gifts. Within three months of returning from his trip, he declared bankruptcy, with $292,000 of debt. In addition, the bankrupt cashed in $23,000 of his Registered Retirement Savings Plans , which he did not disclose in his sworn statement to the trustee.

    The debtor claimed that he sent $75,000 to his family abroad during the two-year period before bankruptcy to pay medical expenses, make financial support payments and pay ransom for a kidnapped brother. None of these claims could be supported by evidence of any kind. Also, according to the bankrupt, approximately half of his total debt could be attributed to gambling and accrued interest.

    The decision to oppose the bankrupt’s discharge was based on a number of factsFootnote 1 including:

    • Bankrupt brought on, or contributed to, the bankruptcy by unjustifiable extravagance in living or by gambling.

    Court decision

    Cra Has The Power To Force Collections

    Debts Not Erased In Bankruptcy

    The Canada Revenue Agency is responsible for the administration of several tax credit and social benefit programs. It is empowered by the federal, provincial, territorial, and First Nation governments to handle Canadas tax revenue, benefits, and other related programs.

    But the governments also empower it to force the collection of unpaid taxes, and income tax debt. And the CRA can achieve that in several ways. The Agency can freeze your bank accounts, garnish your wages, seize your investments, and more.

    As you can see, owing taxes to the CRA is not a trifling matter. But how can you eliminate tax debt?

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    Opposition To Bankrupt’s Discharge By The Trustee Court/osb No: 32


    At the time of filing his second bankruptcy, a bankrupt reported $126,000 in debts. He blamed his financial difficulties on costly divorce proceedings, business failure, fluctuating income from commission sales, lump sum demands by creditors and credit mismanagement. His trustee discovered that under his divorce settlement, the bankrupt received $155,000 in equalization payments in the six months before his bankruptcy. When examined under oath by the OSB, the bankrupt could not explain what happened to these funds. In fact, during the same period he was receiving the equalization payments, the bankrupt used his credit cards to pay for a trip for four to Mexico. He also admitted that he bought gifts on credit when he knew he couldn’t afford to pay for them. As well, the bankrupt did not complete his second insolvency counselling session as required under the Bankruptcy and Insolvency Act. His trustee opposed his discharge, seeking to obtain funds equivalent to the equalization payments for the bankruptcy estate.

    The decision to oppose the bankrupt’s discharge was based on a number of facts,Footnote 1 including:

    Court decision

    What Is A Licensed Insolvency Trustee

    A Licensed Insolvency Trustee is an officer of the court who balances the interests of you and your creditors. In addition to helping you assess your situation, a Licensed Insolvency Trustee will inform and advise you about both the proposal and bankruptcy processes and play an impartial role in ensuring your rights, as well as those of the creditors, are respected.

    A Licensed Insolvency Trustee is the only professional authorized to administer government-regulated insolvency proceedings that allow you to be discharged from your debt, such as a consumer proposal or a bankruptcy.

    When you work with a Licensed Insolvency Trustee, you can rest assured that you are dealing with someone who has demonstrated that they have the knowledge, experience and skills to be granted a license from the Office of the Superintendent of Bankruptcy, and is overseen by federal regulators.

    A Licensed Insolvency Trustee:

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    Tax Debt In Chapter 7 Bankruptcy

    With Chapter 7 bankruptcy, known as straight bankruptcy, things are more straightforward. If you meet the five criteria defined above, then the tax debt gets discharged. The discharge will also include penalties and interest generated by that debt.

    If the tax debt doesnt meet those criteria, then it and any penalties generated from it will not be discharged. You can still file for bankruptcy and have your other debts discharged, but you will still owe those taxes and must repay them.

    Dealing With Income Tax Debt

    How long does personal bankruptcy last in Canada

    An Increasing number of people in Canada are finding themselves with tax debt. Even if you file your taxes every year, it is still possible to end up owing the Canada Revenue Agency . There are many reasons a person may find themselves owing a substantial tax debt. Typically, an employer will deduct taxes from your earnings. This usually ensures that you do not become liable for additional taxes on your income. Where a lot of people run into problems is alternative sources of income. This could include any secondary business, multiple pensions, and business owners. In the majority of cases, persons who work for themselves or have secondary sources of income are at a higher risk. If you are facing tax debt, choosing the right licensed professional could save you hundreds of thousands of dollars. Are you wondering if you should seek advice from an accountant, tax lawyer, or licensed trustee? We have answers.

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    More Formal Options For Addressing Your Tax Debt

    Filing a consumer proposal with a licensed insolvency trustee will stop both collection action and interest and penalties. Normally a proposal is for less than 100% of the debt you owe, however, CRA has specific criteria regarding proposals. Another option is . Its a common misconception that personal income tax debt is not discharged by bankruptcy. In fact, personal income taxes are covered by bankruptcy.

    Opposition To Bankrupt’s Discharge By The Trustee Court/osb No: 41


    A man whose only sources of income were welfare and child tax benefits incurred debts of more than $100,000 on 17 credit cards, mainly within the five-month period leading up to his bankruptcy. To obtain access to credit, this first-time bankrupt, who had been unemployed since 1999, would declare yearly income of $48,000 on credit-card applications. The trustee opposed his discharge.

    The decision to oppose the bankrupt’s discharge was based on a number of facts,Footnote 1 including:

    • Bankrupt brought on, or contributed to, the bankruptcy by unjustifiable extravagance in living.

    Court decision

    The Court ordered the bankrupt to pay $20,000 to the estate.

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    Can You Negotiate Payment Terms With The Cra

    When you are dealing with a tax debt, the worst thing that you can do is ignore it it will not go away on its own and CRA will get more and more aggressive in their attempts to get what they believe is owed to them.

    As mentioned, the agency has very strong powers and trying to ignore the issue or attempting to avoid the CRA can lead to serious issues such as wage garnishment, frozen bank accounts, seized assets, and even potential criminal charges.

    While the CRA will never accept less than is owed to it, it may be possible to negotiate a payment plan with the agency. This sort of plan can prevent the CRA from taking further collection actions against you. However, its important to handle any and all communications with the CRA properly. The agency can be very difficult to deal with.

    CRA agents have years of experience in both the fine details of Canadian tax law as well as in negotiating with taxpayers. This means they have the upper hand in nearly every negotiation process. Not only are they experienced, but they know that they have very strong powers. They use these powers as a threat to influence the negotiating process and encourage taxpayers to take whatever deal they offer. If you know that the CRA is going to freeze your bank account if you dont come to an agreement, youll be a lot more likely to accept nearly any terms that avoid this fate.

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