POST-BANKRUPTCY TAX RETURNS
The Bankruptcy and Insolvency Act legislates that all tax refunds (pre- or post-bankruptcy), as well as prior years, are assets of your bankrupt estate. Regardless of who prepares your bankruptcy tax returns, any resulting tax refunds will be forwarded by the Canada Revenue Agency (“CRA”) to the trustee, and retained for the benefit of your creditors. Any balance owing on the post-bankruptcy tax return will be your responsibility to pay in full to the CRA.
It is the responsibility of your tax preparer to ensure that your post-bankruptcy tax return complies with CRA’s tax rules and legislation. In our effort to provide additional assistance to you, we would like to offer some guidelines which should be incorporated into the preparation of your post-bankruptcy tax return:
- Post-bankruptcy tax returns cannot be e-filed with CRA. A paper return must be submitted to the CRA, clearly marked as the Post-Bankruptcy Return, and should include the date of bankruptcy on page 1 of the jacket.
- Income to be reported on the post-bankruptcy return is strictly limited to income earned/received from the date of bankruptcy until December 31, 2015.
- If A. Farber & Partners has already filed your pre-bankruptcy tax return with CRA, this return will need to be referred to in the preparation of the post bankruptcy return. If you have not already been provided with a copy of the pre-bankruptcy return, please contact our Tax Department to request a copy of it (as well as the corresponding Notice of Assessment, if it has already been received from the CRA). Please be reminded that any balance owing to the CRA upon assessment of the pre-bankruptcy return is a debt included in your bankruptcy. No payment is to be made to the CRA in respect of this debt.
- All non-refundable tax credits are pro-rated according to the number of days in the post-bankruptcy period. Many major tax software packages have a programmed bankruptcy function which will calculate this pro-ration for you.
- Effective January 1, 2004 the Ontario Government instituted the Ontario Health Premium. Pursuant to Bill 106 of the Ontario Legislature, this tax is based on your total taxable income for the entire year (including your pre bankruptcy income), and payable on December 31st. Therefore, the Ontario Health Premium for 2015 may be assessed (in part, or in total) on your post bankruptcy tax return.
- Please note that the CRA may assess CPP contributions for any self-employment income earned in the pre bankruptcy period. After the Steele vs Revenue Canada court case in 1994, CRA should not be assessing this amount, but this often still appears on the post bankruptcy assessment. If that happens, you will have two options once you receive your notice of assessment. (1) You will be able to pay the total amount owing, in which case your calculation of CPP benefits will include these CPP contributions when you retire; or (2) You will be able to appeal the assessment, following the normal appeal process as described on the back of the Notice of Assessment, citing Steele vs. Revenue Canada as the basis for your appeal.
- Charitable donations are not an allowable tax deduction on a post bankruptcy tax return, unless you have been discharged from bankruptcy prior to December 31, 2015.
- Any claim for education credits and medical expenses must be limited to those incurred only during the period from your date of bankruptcy until December 31, 2015.
- Any unused credits carried forward from years preceding your bankruptcy for tuition, capital losses, business losses, etc, do not survive the bankruptcy. You will not be able to claim these credits on the post-bankruptcy return, or on any subsequent tax filing.
- Unused room for RRSP deductions is not affected by bankruptcy. This room will still be available to you, post bankruptcy.
- Home Buyer Plan and Lifelong Learning Plan repayment obligations are NOT discharged by bankruptcy. Your requirement to make repayments to the CRA in accordance with your plan will continue until the full withdrawal amount has been repaid, either by RRSP contribution or by income inclusion in the prescribed time period. In the year of bankruptcy, repayment by income inclusion MUST be included in the post-bankruptcy return.
- Ontario tax credits are based on income received during all of 2015. If you are claiming rent or property taxes paid in order to qualify for Ontario Trillium Benefits (“OTB”), you should claim the amount of rent or property tax paid during the entire 2015 (before and after filing for bankruptcy). Your eligibility for any possible OTB credits will be based on the total income earned by you (and your spouse, if applicable) during the entire of 2015.
If you or your accountant has any questions with respect to the preparation of your post-bankruptcy income tax return, please feel free to call our Tax Department at (416) 496-3084