Income Tax Debt And Bankruptcy

2010-06-10

Bradley Milne

Hello,

Many people believe that personal income tax debt cannot be included in bankruptcy, however, this is incorrect. Personal income tax debt, in most cases, is similar to other debts such as a credit card or unsecured bank loan in that it is extinguished or “forgiven” in bankruptcy.

Person talking on a cellphone looking at spreadsheets on their laptop

One exception comes to mind. If you owe a substantial tax debt and you own a personal residence or other parcel(s) of land, Canada Revenue Agency (CRA) may without notice register a lien on your property which remains enforceable after bankruptcy. If the property were to be sold, the debt to CRA would be paid upon the conclusion of the sale similar to a mortgage. This is not very common. It should also be noted that such a lien cannot be registered after the date of bankruptcy for a tax debt incurred prior to the date of bankruptcy. Upon filing for bankruptcy, there is a stay of proceedings which prohibits creditors from commencing or continuing their collection efforts.

As has been noted on this blog previously, if you owe more than $200,000 in personal income tax debt and it accounts for at least 75% of your total debts, you would not be eligible for an automatic discharge. Instead, a court hearing would be required to consider your discharge (note: the discharge is what you receive when you have completed all of the required duties and the bankruptcy is finished).