If you’re facing mounting debt to the Canada Revenue Agency (CRA), you might be wondering: Does bankruptcy clear CRA debt? It’s a pressing question for many Canadians who are struggling to keep up with their taxes, especially in these tough economic times. The answer isn’t straightforward, and it depends on the type of debt you owe, as well as your personal and financial situation.
Let’s break it down so you can understand your options when dealing with CRA debt and whether bankruptcy is the right solution for you.
Types of CRA Debt
Before diving into how bankruptcy impacts your CRA debt, it’s important to understand the types of debt the CRA collects. CRA debt comes in several forms, and they aren’t all treated the same in bankruptcy proceedings.
- Personal Income Tax Debt
This is the most common type of CRA debt. It includes amounts owed after filing your annual income tax return, including any interest and penalties. - Corporate Income Tax Debt
If you own a corporation, you may owe corporate income tax if your business is profitable. Just like personal income tax, these amounts can pile up if not paid on time. - Payroll Remittances
As a business owner, you are responsible for remitting employee payroll deductions (income tax, CPP, and EI) to the CRA. Failure to do so leads to substantial penalties and interest. Worse yet, the CRA is particularly aggressive when it comes to collecting payroll deductions because it considers this money to belong to your employees. - GST/HST
Businesses are required to collect and remit Goods and Services Tax (GST) or Harmonized Sales Tax (HST) on sales. If you fail to remit these taxes, you’ll find yourself owing significant amounts to the CRA.
Does Bankruptcy Clear CRA Debt?
Now, let’s answer the big question: Does bankruptcy eliminate your CRA debt? The short answer is: It depends.
What Bankruptcy Does Clear
In Ontario, declaring bankruptcy can eliminate certain types of CRA debt under certain conditions. Personal income tax debt is typically dischargeable in bankruptcy (particularly, the personal tax owing for more than one year), meaning that once you’ve been discharged from bankruptcy, your older personal tax debt can be wiped out.
Similarly, corporate income tax debt may also be included in a bankruptcy filing if the business is closed and its assets liquidated. However, this does not relieve any personal liability for directors if they are personally responsible for the corporate debt.
What Bankruptcy Does Not Automatically Clear
Certain types of CRA debt are treated differently and are not easily discharged:
- Payroll Remittances: Payroll remittances, including source deductions for income tax, CPP, and EI, are considered trust funds. These debts often survive bankruptcy, meaning you’ll still be on the hook even after the bankruptcy is discharged.
- GST/HST: Similar to payroll remittances, GST/HST debts are also considered trust funds. In most cases, these debts will survive bankruptcy. This means that even after your bankruptcy is discharged, you may still owe these amounts to the CRA.
Conditions to Be Met
For personal income tax debt to be cleared through bankruptcy, specific criteria apply. If you owe more than $200,000 in personal income taxes, and this amount represents more than 75% of your total unsecured debt, your bankruptcy discharge will face additional scrutiny under the Bankruptcy and Insolvency Act (BIA).
In such cases, the court must hold a hearing to determine whether to grant a discharge. The court may refuse a discharge, grant a conditional discharge, or require you to repay part of the debt. This means that even if you declare bankruptcy, you might not be fully relieved of your personal income tax obligations without a court decision.
The Pros and Cons of Bankruptcy for CRA Debt
Pros:
- Potential discharge of eligible tax debts
- Immediate relief from creditor actions, including CRA collections
- Fresh financial start for eligible debt
Cons:
- Not all CRA debts are discharged
- Significant impact on credit score
- Potential loss of assets
- Difficulty obtaining credit in the future
- May affect employment opportunities in certain field
Alternatives to Bankruptcy
Before jumping into bankruptcy, it’s essential to explore alternatives that might help you avoid such drastic measures. Bankruptcy is not a one-size-fits-all solution, and depending on your situation, there may be better options available.
- Work with a Tax Advisor, Tax Lawyer or Bankruptcy Professional
The first step should be to consult a tax advisor, tax lawyer or a bankruptcy professional. They can help you fully understand what CRA is assessing and determine if the amounts are accurate. CRA assessments can sometimes include errors or inflated interest and penalties that may not apply to you. - File a Notice of Objection
If you disagree with a CRA assessment, filing a notice of objection allows you to formally challenge the amount owed. This process can provide relief if the assessment is incorrect or unfair. - Apply for Relief from Interest and Penalties
If your debt was caused by extenuating circumstances like illness or financial hardship, you may qualify for interest and penalty relief. This doesn’t eliminate your debt, but it can reduce the amount owed. - Create a Payment Plan
The CRA may be open to negotiating a payment plan. This allows you to repay your debt in installments rather than in a lump sum. A tax advisor can help you present a reasonable payment proposal to the CRA. - Consumer Proposal
A consumer proposal is a legal alternative to bankruptcy. In a consumer proposal, you work with a licensed insolvency trustee to negotiate with the CRA to pay off a portion of your debt over time. This option can help you avoid bankruptcy while still getting your CRA debt under control.
Conclusion
So, does bankruptcy clear CRA debt? Yes, it can, but it doesn’t clear all types of CRA debt, and there are conditions that must be met. It’s essential to understand the nature of your debt and the potential outcomes before choosing bankruptcy.
That’s why working with a tax advisor, tax lawyer and/or an insolvency trustee is critical. They can help you explore all your options, whether that means filing a notice of objection, applying for relief, negotiating a payment plan, or determining if bankruptcy is your best route.
Remember, bankruptcy is a serious decision with long-term consequences, and understanding its impact on your CRA debt is key to making the right choice. If you’re struggling with CRA debt, take action now and seek professional advice tailored to your situation.
Disclaimer: The content above should not be taken as formal legal, tax or bankruptcy advice. The rules are complex and keep changing. Contact a tax or insolvency professional for formal guidance applicable to your specific circumstances.
