September 9, 2022
Many people try to eliminate their tax debts by filing for bankruptcy. Before doing that, however, you should explore all other options. Bankruptcy should only be used as a last resort.
Although tax debts are included in a bankruptcy application, you may not get a discharge for several years and may find yourself in a state of “bankruptcy limbo” as an undischarged bankrupt. Generally speaking, under the Canadian Bankruptcy and Insolvency Act ( the “BIA”), a first time bankrupt normally gets an automatic discharge after nine months and their debts are wiped clean. This is not the case with tax debts.
Usually the Canada Revenue Agency, (the “CRA”) will oppose your discharge application and seek an order for payment of the tax debt over several years. Under the BIA, if you owe the CRA more than $200,000 and your tax debt is 75% or more of your total debt load, then you do not get an automatic discharge. Instead, you have to apply to the Bankruptcy Court and convince the Court that you should be discharged. Again, the CRA will most likely oppose your discharge application, thereby dragging out the time that you will be in bankruptcy. This can drag on for many years with you being in a state of undischarged bankruptcy.
Before filing for bankruptcy, explore all other options that may be available to reduce or eliminate your tax debts. You should first consult a Canadian tax attorney, or other tax professional, experienced in resolving tax disputes with the CRA.
