In this guide
Does bankruptcy clear tax debt in Canada?
Filing for bankruptcy can legally clear your tax debt alongside other unsecured debts. The CRA is treated the same as other unsecured creditors, like banks, loan providers and credit card companies.
The Canada Revenue Agency (CRA) is a formidable creditor and can be difficult to negotiate with. They manage collections for various debts, including personal income tax, HST, employment deductions, student loans and overpaid benefits. If you have a large tax debt, they’ll charge penalties, and interest is compounded daily.
They can also apply tough collection measures, including garnishing wages and bank accounts, seizing assets, offsetting benefits, withholding credits, diverting tax refunds and placing a lien on your home.
Most actions do not require a court order, unless it is a lien on a property, which requires the CRA to certify the debt in federal court or obtain a provincial judgment first.
Source: Income Tax Act – Section 224; Canada Revenue Agency – Putting a lien on or seizing your assets
What bankruptcy eliminates and what it doesn’t
| Debt | Cleared by bankruptcy | What happens to it |
|---|---|---|
| Personal income tax arrears | Yes | Unsecured debt that is discharged when your bankruptcy is completed |
| GST/HST arrears | Yes | Unsecured debt that is discharged when your bankruptcy is completed |
| Tax secured by a lien registered before you filed | No | Stays attached to the property as a secured claim |
| Source deductions withheld from employees | No | Held in deemed trust for the Crown, so a discharge doesn’t impact them |
| Government student loans, within seven years of study ending | No | Survives the discharge under the Bankruptcy and Insolvency Act |
| Tax for the period after your filing date | No | Yours to pay |
Source: Bankruptcy and Insolvency Act – Section 178
Can the CRA delay your bankruptcy discharge?
The CRA can oppose your bankruptcy discharge. If your tax debt is substantial or makes up a large chunk of your total debt, you may need to meet certain conditions before being discharged.
If your personal income tax debt is $200,000 or more and accounts for 75% or more of your total unsecured proven claims, you cannot be automatically discharged from bankruptcy. Instead, your trustee must schedule a court hearing. This process will take longer because a judge must review your case and establish specific conditions for your discharge.
Source: Bankruptcy and Insolvency Act – Section 172.1
What happens when you file for bankruptcy?
Bankruptcy is a legal process that helps people eliminate unsecured debts that they cannot afford to repay. A stay of proceedings begins on the day you file, so the CRA and your other unsecured creditors have to stop contacting you. Penalties and interest are frozen, and wage garnishments and court orders stop.
To be discharged, you must complete some duties, including attending financial counselling and supplying proof of your income and expenses. A Licensed Insolvency Trustee will guide you through the process. Your CRA debts are eliminated when you complete your bankruptcy.
Source: Bankruptcy and Insolvency Act – Section 69.2 (consumer proposal) and Section 69.3 (bankruptcy)
How long does it take to clear tax debt in bankruptcy?
If this is your first bankruptcy and you don’t owe surplus income, it will take nine months to clear your tax debts.
If your household income is higher than what the Superintendent of Bankruptcy sets each year, you’ll have to pay extra into the estate every month. This means a first bankruptcy will last 21 months instead of nine.
Source: Bankruptcy and Insolvency Act – Section 168.1
If the CRA opposes, or your tax debt crosses the $200,000 and 75% thresholds above, you are not eligible for an automatic discharge, and the court decides when you are released.
What happens to your unfiled tax returns?
Any unfiled tax returns for previous years need to be filed as part of your bankruptcy. If an income tax return was supposed to be filed for the year before the year of bankruptcy and you didn’t file one, your Licensed Insolvency Trustee will file it.
Any refund due goes to your trustee as property of the bankruptcy estate and gets distributed among your creditors. Any money owed on those returns is included in your bankruptcy.
Your trustee also files a pre-bankruptcy return from January 1st to the day before your bankruptcy, and might file an in-bankruptcy return to report income from liquidated assets, such as RRSP contributions the estate can claim, or assets from a business being wound up. Your RRSP itself is largely protected, and only contributions made in the 12 months before you filed can be taken.
Source: Bankruptcy and Insolvency Act – Section 67(1)(b.3)
You are responsible for filing the post-bankruptcy return covering the date of bankruptcy to December 31st, though your trustee can file it on your behalf. Any refund owed will go to your trustee for distribution among your creditors. Any money you owe on this return is a new debt not included in your bankruptcy.
Will filing for bankruptcy affect my tax refund?
If you are due a tax refund for returns before the year of bankruptcy, this money is sent to your trustee to form part of your bankruptcy estate, which is distributed amongst your creditors. This also applies to refunds for your pre-bankruptcy and post-bankruptcy returns.
After the year of your bankruptcy, future tax refunds will be yours to keep.
Source: Canada Revenue Agency – Doing your taxes when filing for bankruptcy
A consumer proposal lets you keep all your tax refunds.
Should you file bankruptcy for CRA tax debt?
Bankruptcy clears the debt, but it isn’t always the best way to deal with it. Can you sort it out with the CRA directly, or would a consumer proposal suit you better?
Can I not just negotiate my tax debt down with the CRA?
The CRA can set up a payment plan that lets you pay your balance over time, but you still have to repay the full amount with interest. The CRA will only accept a formal debt arrangement like bankruptcy or a consumer proposal if you want to pay less than what you actually owe.
Learn more about your CRA tax debt relief options.
Under the CRA’s taxpayer relief provisions, you can request that penalties and interest be cancelled or waived. However, you will still owe the original tax amount.
Bankruptcy or a consumer proposal?
While bankruptcy does eliminate tax debt in Canada, it’s not always the best approach. Bankruptcy can be expensive if you have to pay surplus income and can often be avoided by filing a consumer proposal instead.
If you have a high income and valuable assets, a Licensed Insolvency Trustee may recommend a consumer proposal to handle your tax obligations. This allows you to settle your debt with the CRA over a term of up to five years, stop collection actions, and keep your tax refunds.
Learn the other ways to deal with CRA tax debt.
Frequently asked questions
Does bankruptcy clear CRA debt?
Yes, personal income tax, HST, and most other amounts owed to the CRA are considered unsecured debts under the Bankruptcy and Insolvency Act. This means they are discharged once your bankruptcy is complete. However, if a lien was registered against your property before you filed for bankruptcy, that portion will survive as a secured claim.
Can the CRA stop me from going bankrupt?
The CRA cannot prevent you from filing for bankruptcy. However, it can oppose your discharge. If your income tax debt is $200,000 or more and constitutes at least 75% of your unsecured claims, a court hearing will be necessary before you can receive your discharge.
What happens to a CRA lien if I file bankruptcy?
A CRA lien registered against your property before you filed becomes a secured claim, so bankruptcy does not eliminate it, and it remains in effect after your discharge.
The lien remains attached to the property, interest continues to accumulate on the outstanding balance, and the debt will be settled from the proceeds when you eventually sell the property.
Will I lose my RRSP if I go bankrupt over tax debt?
Registered retirement savings are protected in bankruptcy, except for contributions made in the 12 months before filing, which can be claimed by the estate.
Will the CRA keep garnishing my wages after I file?
Once you officially file for bankruptcy or a consumer proposal, the Canada Revenue Agency (CRA) must stop garnishing your wages. Filing triggers a legal protection known as a stay of proceedings, which stops collection actions and wage garnishments from unsecured creditors, including the CRA.
Does bankruptcy clear CERB debt?
The Office of the Superintendent of Bankruptcy has confirmed that CERB overpayments are provable claims in bankruptcy and can be discharged with other unsecured debts, unless the Crown can prove otherwise under section 178 of the Bankruptcy and Insolvency Act.
Does bankruptcy clear student loans or OSAP?
In Canada, federal and provincial student loans can only be automatically discharged through bankruptcy or a consumer proposal if at least seven years have passed since you were last a student.
Does bankruptcy clear EI overpayment debt?
EI overpayments are ordinary unsecured debts, so they are discharged in bankruptcy. However, if the government proves you received the funds through fraud or misrepresentation, that portion will remain payable under section 178 of the Bankruptcy and Insolvency Act.
Get help with CRA tax debt
If you have income tax debt, don’t wait for the CRA to start garnishing your wages, seizing your assets, or putting a lien on your property.
Your options are limited once a lien is placed on your property. A licensed Insolvency Trustee can evaluate your debts and recommend the best course of action to resolve them. Schedule a free consultation now.
