Bankruptcy in Canada - High Tax Debts

High personal income tax debt is given special attention in a Canadian personal bankruptcy proceeding. 

Section 172.1 of the Bankruptcy & Insolvency Act defines a "personal income tax debtor" as a bankrupt who owes $200,000 or more in personal income tax debt, with the personal income tax debt making up at least 75% of the total proven unsecured claims. 

A personal income tax debtor is not entitled to an automatic discharge, which means a court hearing is required for the bankrupt to be discharged from bankruptcy.

The Trustee is required to obtain the appointment for the court hearing.   The timing of the court hearing can range from 9 to 36 months after the date of bankruptcy, depending on the circumstances.

At the discharge hearing, the court has the power to grant one of the following discharge orders:

• Refused - the discharge is refused outright and leave may be granted to reapply at a future date;
• Suspended - the discharge will be effective on a future date specified in the order; or
• Conditional - the bankrupt will be required to fulfill conditions specified in the order, which usually include payment of further sums of money to the bankruptcy estate and/or future tax compliance.

In considering what type of discharge order is appropriate, the court will take into account:

• the bankrupt's circumstances when the tax debt was incurred;
• the bankrupt's efforts, if any, to repay the tax debt;
• whether the bankrupt paid other debts and ignored the tax debt; and
• the bankrupt's financial prospects for the future.

In making its decision, the Court will also consider legal decisions made in similar cases as well as any recommendations from the Trustee and Canada Revenue Agency.  

The Trustee's role at the court hearing is to provide objective information to the court on the causes of bankruptcy, the bankrupt's conduct and any other relevant information.  The Trustee cannot advocate for or represent the bankrupt at the court hearing; however, the bankrupt is entitled to be represented by a lawyer at the court hearing (at the bankrupt's own cost).
 
If you are facing high personal income tax debt in Canada, filing for bankruptcy is just one option.  A personal income tax debtor can also file a proposal to his or her creditors.  A proposal, if accepted by the creditors, will provide the debtor with a new arrangement with his or her creditors with no requirement for a court hearing at the end of the proposal.

For more information about personal income tax debt in a bankruptcy or a proposal, contact me for a free consultation.

Lana Gilbertson is a Licensed Insolvency Trustee serving the Greater Vancouver and Vancouver Island regions. To learn more about how Lana can help, contact her directly at 604-637-1599.

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