17 Apr Can You Include Income Tax Debt in Bankruptcy?
The short answer is – Yes, bankruptcy does include income tax debt owing to CRA (Canada Revenue Agency). This is most relevant to self-employed tax payers, as they often fall behind on their taxes. In addition, filing a Consumer Proposal also allows you to include income tax debt.
Always File Your Tax Returns – Even If You’re Behind On Paying Past Income Tax Debt
Even if you cannot afford to pay your past income tax debt, it is important that you file your tax returns.
Why? Because the situation will:
- A) – Not get any better- it’ll get worse; and
- B) – As the old saying goes “death and taxes” do not go away.
You’re probably thinking: “Won’t CRA be mad if I’m not paying my taxes?”. Well, they won’t be happy. However, you need to find out how much you owe, and then you can determine your options, as discussed next.
What to Do If You Can Make Payments
Ask yourself: “Can I afford to pay the outstanding taxes?”. If so, then do it. Contact the CRA and make agreed-upon payments until you get caught up.
What You Should Do If You Can’t Make Payments
But, what if you can’t afford to pay CRA? Then, you should talk to a LIT (Licensed Insolvency Trustee), and they will guide you to the proper option.
These choices include:
- Filing for Bankruptcy
- Filing a Consumer Proposal
Both of these options:
- Stop all collections
- End all garnishments on wages and self-employed income
- Allow for a fresh start, with zero tax debt going forward.
A Licensed Insolvency Trustee Can Help Manage CRA Debt
In a Bankruptcy (or a Consumer Proposal), CRA is just an unsecured creditor. In addition, HST debt can similarly be included. But remember, only a LIT (Licensed Insolvency Trustee) can deal with CRA debt, whether it’s income tax or HST debt.
Avoid Any Delay In Dealing with Income Tax Debt
We have observed that people owing income tax are often reluctant to deal with the problem and tend to put it on the ‘back burner’. This is a mistake!
Any delay in dealing with tax debt can lead to:
- Tax liens on your house
- Your bank account being frozen
- Your wages garnished
- For self-employed individuals, up to 50% of your compensation can be garnished
In conclusion, get your taxes up to date. When the debt is unaffordable, you should talk to the debt consolidations professionals at McLennan & Company Ltd., LIT.