Despite their differences, Consumer Proposals and Bankruptcy both guarantee protection from creditors. But both debt relief options are unique in how they deal with tax refunds.
In a Bankruptcy, your Trustee will prepare and file your returns and any refunds will be distributed to your creditors. In a Consumer Proposal, you are required to file your own returns and must be up to date with past filings. If you do not owe the CRA money and are entitled to a tax refund, you make keep it.
Licensed Insolvency Trustee, Derek Chase, walks us through the different scenarios and how when you file may have an impact on your tax returns. He also covers:
- When it is advantageous to file a Consumer Proposal vs Bankruptcy
- The best time of the year to file
- What happens to the money if you are owed a tax refund
- Effect on GST and Canada Child Benefits
- CRA’s Right of Set-Off to offset tax debts
Licensed Insolvency Trustees are federally regulated and approved by the Canadian government. With their extensive knowledge of financial services, they will give you honest advice about all the debt relief options available to you while taking into account your tax situation.
Read the Transcript
Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.
I’m Wayne Kay, and in today’s show, we’re going to discuss what happens to tax refunds in a Bankruptcy or Consumer Proposal. Will you be able to keep your tax refunds if you need help with debts? And will there be an impact on a tax refund if you file a Consumer Proposal? How long does the creditors actually have access to your tax refunds?
And do you have to worry about losing your GST credits or maybe your Canada Child Benefit? We’ll learn about that as well.
My guest today is Derek Chase from Derek L Chase & Associates Ltd. Licensed Insolvency Trustee serving Vancouver Island, Sunshine Coast to BC and the BC north coast. Hi, Derek.
Derek Chase 00:57
Hi, Wayne. How are you doing today?
Wayne Kay 00:58
Doing great. How are you doing?
Derek Chase 01:00
Really well, thanks.
Wayne Kay 01:01
Hopefully the holiday season was great for you, but now we’re looking forward to something else that’s coming up in just a couple of months. Tax time.
Derek Chase 01:10
Yes. It comes around every year and seems to come around faster each year, so I don’t know what that says.
Wayne Kay 01:17
It’s kind of weird to be jumping in and talking about it already, but I think it’s important for us to get the heads up on this every once in a while. I actually do some of my tax stuff right at the very beginning of January just to really get a jump on it and see exactly how I ended off the year previous.
Derek Chase 01:34
Yes, well, good for you because that’s a big part of just what we call compliance, of just filing a tax return is getting organized to do so. And in particular, if you’re self employed, you can start off as soon as that December 31 banking closes and you can start preparing, getting ready to file so that you’re not a late filer. Because you’re a late filer, you’re getting hit hard with penalty and interest. So good for you.
Wayne Kay 02:04
Thank you. Now we’re going to learn more about tax refunds in Bankruptcy or Consumer Proposal. Let’s just do a quick recap. What’s a Bankruptcy? What’s a Consumer Proposal?
Derek Chase 02:17
Both of those are Federal Government of Canada options for an individual to help get relief from their debts. They work slightly differently and as a result, tax refunds are treated differently, which is what we’re going to talk about today. But overall, they’re designed for the honest but unfortunate person to get a fresh start with their finances.
Wayne Kay 02:44
So a lot of people look forward to that refund cheque. That’s a major discussion for a lot of people is how much are you getting back? I’m getting back this much. And it’s exciting. And many Canadians need that refund cheque. A lot of people wonder, do they get to keep that tax refund if they need it to help with their debts when they’re in a Bankruptcy or Consumer Proposal?
Derek Chase 03:12
They will in a Consumer Proposal. That’s typically a setting where a person’s tax filing and receipt of refund would just continue on in the normal course. I suppose the exception to that would be if the person owed the income tax department for some other matter, like if they had old tax debts from prior years, and this year you were filing for a refund.
The income tax department has what’s called the right of set off, so they’re allowed to keep that current tax refund, or the pre Consumer Proposal tax refund to offset against the tax debts.
Conversely, in a Bankruptcy setting, you are not going to see that tax refund because even if the Canada Revenue Agency didn’t offset it against old debt, if there was still a net refund there, the government would send that into the Bankruptcy for the benefit of the other creditors. So I would generalize to say that in a Consumer Proposal, yes, you should expect to get your tax refund if that’s what normally happens, whereas in a Bankruptcy, you should not expect to get your tax refund.
Wayne Kay 04:35
Under a Bankruptcy, the LIT takes care of all expenses. How does that work as far as…
Derek Chase 04:44
Filing the tax return?
Wayne Kay 04:45
Yes. And the refund? It goes to the LIT, it doesn’t go to the person specifically, does it?
Derek Chase 04:54
No. Any refund in a Bankruptcy setting would get sent into the Trustee’s office and the Trustee would deposit it into the Bankruptcy trust account and it would be distributed as an asset of the Bankruptcy.
One thing that I think is important to talk about in that regard is the timing. And it’s a good time to discuss this because we’re towards the end of the calendar year, so the personal income tax year is from January 1 to December 31.
So the date that a person assigns into Bankruptcy is an important date. That’s the day that protection from your creditors is made available, so that there’s no more phone calls, there’s no more collection, the garnish action stops, anything like that. It’s just peace and quiet. But it also is an important day for tax returns because the federal law says that the Trustee has to file your tax return when the year that the Bankruptcy starts. So right now we’re still in 2022. So that you would lose that 2022 tax refund. And the year prior, if that’s not filed, the Trustee would have to file that.
In this example, the Trustee would have to file the 2021 tax return if it wasn’t filed. And basically any tax refund for a year prior to 2022 would not get paid to the individual, it would get paid into the Bankruptcy.
Sometimes we see this when people file for adjustments to their older tax returns if they go oops, made a mistake, didn’t claim this credit or that credit, and I’m going to file an adjustment request if that produces a refund, say for 2019 or earlier, that refund the government would send into the Bankruptcy.
Wayne Kay 07:03
So creditors do sometimes have access to tax refunds. And how long does that go for?
Derek Chase 07:10
So that’s, again, coming back to that date. If we still use the example that Bankruptcy started in 2022, the 2022 calendar tax return would be in jeopardy. You’d lose that to the creditors. But for the calendar year 2023, January 1 to December 31, 2023 tax year, which is filed in spring of 2024, you wouldn’t automatically lose that to your creditors.
So when you think about that, that’s a factor, I suppose, if you’re kind of deciding, when should I do this? It’s going to be better to do it in December than it would be in January. Because in January you’re going to end up losing two tax returns in a Bankruptcy as opposed to just one if you filed it in December.
Wayne Kay 08:11
What about the other credits that Canadians get, like GST credits or the child benefits? Are those affected?
Derek Chase 08:22
They are not affected in a Consumer Proposal. So that’s, I think, another reason that Consumer Proposals have grown in popularity is people are just more normal. You keep those things happening in the normal flow.
So long as a tax return is filed, there’s a lot of good reasons to file a tax return and getting a GST credit or having your Canada child benefit continue on without any interruption, or two good reasons. Under the Bankruptcy side of things, GST credits have the same characteristics as tax refunds. The income tax department will send it into the Bankruptcy. Now, there is a quirky rule that says if receipts get to a high enough total in a Bankruptcy setting, then the Trustee has to refund the GST credits to the individual. But at the offset at the start of it or at the onset, the GST credits will roll into the Bankruptcy.
The child benefit does not go to your creditors. The child benefit keeps going to the household so long as you file your tax return and your household’s income level warrants it and you qualify. So, there is a bit of a difference there.
Wayne Kay 09:47
You’re talking a lot about people that don’t file their taxes. Do you find when people get behind or in debt, just worrying about taxes and filling out their income tax information is not important?
Derek Chase 10:02
I think it’s just something that you don’t want to do. You don’t want to open that envelope because, you know, it’s a credit card bill. And when a person, we do see that fairly regularly when a person misses filing a tax return, and then there’s a bit of a snowball effect there. So I didn’t file it for the following year or even three years.
Eventually, the Canada Revenue Agency, they will sometimes come out and arbitrarily assess your taxes, which basically means they’ll guess and they’ll get something on their records. And once it’s on their records, then they can put their collection wheels in motion to potentially freeze your bank account or to garnish your pay.
And that can sometimes be solved just by filing those tax returns, especially if your income were a lot less than what they guessed. But if it’s in the ballpark and you haven’t filed those tax returns, or even if you did file a tax returns and you’ve got that big tax debt, then certainly a Consumer Proposal or a Bankruptcy filing can stop the income tax department from doing those using those heavy handed collection methods.
Wayne Kay 11:19
I can see how this snowballs because not only are you having trouble catching up and making payments and there’s just not enough money at a certain point, then all of a sudden you miss the income tax and possibly you owe money. So now all of a sudden they have penalties and interest and everything else and it can really grow quick.
When you do the Consumer Proposals and the Bankruptcies, can you also get protected from the government wanting their share as well?
Derek Chase 11:53
Absolutely, yes. That will give you relief from what’s owing currently. It doesn’t give you relief from what’s owing in the future. So as time goes by you’re still expected to file future returns and future GST returns and payroll remittances and whatnot, but it can give you a reset in regards to what’s on the books currently as of today.
And I would also add that we’re not all cut out to be accountants or bookkeepers and it’s certainly worth the cost. If that’s something that you struggle with or something that really you just don’t want to do, it’s not your thing, then hire somebody because then that can take a whole load off and it’s done right and you’re not all of a sudden arm wrestling with the government about problems.
Wayne Kay 12:51
Yeah, it’s busy enough running your own empire, never mind dealing with these little things that it’s so easy to forget.
Derek Chase 13:00
Wayne Kay 13:01
Yes. Any more information we can get regarding tax refunds in Bankruptcy and Consumer Proposals? Anything else you’re thinking that we need to know?
Derek Chase 13:13
Well, yes, it is. A tax refund is treated differently in a Bankruptcy versus a Consumer Proposal. And like I say, I think that’s one of the reasons that Consumer Proposals have grown in popularity over the last few years.
But yes, you need to be aware of those factors before you choose which way to go if you’re going to get protection from your debts. Because if you can arrange it such that you get your tax refund this year before you started a Bankruptcy filing, then why not?
Wayne Kay 13:48
Derek Chase 13:49
And the sooner you can get organized to file, the better off – not that far away from starting to gather up the information to do it. So I’d encourage people to do that.
Wayne Kay 14:01
And that’s why you’re there as well. Free consultation. If somebody has questions, they can contact you through the website Bankruptcytrusteebc.ca. Derek, it’s always a pleasure, thank you very much for your time.
Derek Chase 14:14
Thanks very much, Wayne. Have a great day.
Wayne Kay 14:16
And that is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.