Can I File Bankruptcy on Taxes?
Yes. If you have income tax debt, you can declare bankruptcy on taxes owing. In Canada, tax debts are treated the same as any other type of unsecured debt, such as a credit card or a personal line of credit. If you successfully complete a bankruptcy, all tax debt will be cleared. However, filing for bankruptcy is often a last resort for getting out of debt and it may not be your only solution. A Licensed Insolvency Trustee can walk you through your options, so you can determine the best path to take.
Options for Repaying Your Income Tax Debt
Before you consider your options, it’s important to complete and file all outstanding tax returns. Once you know exactly how much you owe, you will be in a better position to decide how to resolve your debt.
Option 1: Tax Relief
If you are unable to meet your tax obligations due to events beyond your control, such as a natural disaster, severe illness, or financial hardship, you can apply for tax relief with the Canada Revenue Agency (CRA). Note that if you do qualify, tax penalties or interest may be cancelled or waived, but you will still need to pay the principal amount.
Option 2: Consumer Proposal
You may be able to negotiate an agreement with the CRA to pay less than the full amount of income tax debt owing by filing a consumer proposal. Administered by a Licensed Insolvency Trustee, a consumer proposal is a legally binding agreement between you and your creditors to settle your unsecured debts. A consumer proposal allows you to negotiate fixed monthly payments or lump sum settlements over a set period of time, up to a maximum of five years.
Once you have fulfilled the terms of the consumer proposal, you will be released from all unsecured debts owed on the day you filed. A consumer proposal will stay on your record for three years after your last payment.
Option 3: Bankruptcy
If your income tax debt is substantial or your consumer proposal was refused, it may be appropriate to file for bankruptcy. The process of bankruptcy starts when you meet with a Licensed Insolvency Trustee and complete the required forms to declare bankruptcy. Once the filing is complete and the bankruptcy has been registered with the Office of the Superintendent of Bankruptcy, your bankruptcy duties will begin. A first-time bankruptcy process generally lasts 9 to 21 months.
Upon completion of your bankruptcy duties, your tax debts will be cleared. A bankruptcy will typically stay on your record for six years from the date of your discharge.
Choosing the Best Path Forward
If you’re struggling with income tax debt, it’s important to understand your options. Rest assured, your local MNP LTD Licensed Insolvency Trustee is here to provide the impartial advice and hands-on guidance you need to choose the best course of action. Let us walk you through your options. Start today with a free confidential consultation.