What Happens To My Tax Refund In Bankruptcy?

“What happens to my tax refund in bankruptcy? Will I lose it? What happens if I owe money on my tax return? Will my bankruptcy take care of it?”

Trustee Requirement To File Tax Return

The Canadian Income Tax Act requires your Licensed Insolvency Trustee to file your personal income tax return for the year in which you filed bankruptcy. For example, if you file bankruptcy in 2020, you Trustee will be required to prepare and file your 2020 tax return.

Continuing this example, any income tax refund resulting from the 2020 tax return would be sent to your Trustee by the Canada Revenue Agency (“CRA”). The reason why this is so is that your income tax refund is considered an “asset”, and accordingly, that asset has to be remitted to the Trustee by CRA. The income tax refund is deposited by the Trustee into its trust account for the benefit of your creditors.

Now to get into more detail – continuing the above example, with respect to the 2020 income tax return prepared by the Trustee, he will need to prepare two separate returns.

Pre-Bankruptcy Tax Return

The first return your Trustee will need to prepare and file is the pre-bankruptcy income tax return, which covers the period from January 1st 2020 up to the actual bankruptcy date. If you owe money on this tax return, this tax debt will be discharged in your bankruptcy proceedings because it’s considered debt existing on the date of bankruptcy. Likewise, if there is a refund resulting from this return, it will be sent to the Licensed Insolvency Trustee as an “asset” of your bankruptcy estate.

Post-Bankruptcy Tax Return

The second return your Trustee will usually prepare is the post-bankruptcy income tax return, which will cover the period from the day after you filed bankruptcy to December 31st 2020. If you owe money on this tax return, you will be liable to pay it since it’s considered “post-bankruptcy” debt. If there is a refund resulting from this return, it will be sent to the Licensed Insolvency Trustee as an “asset” of your bankruptcy estate.

Note that although the Trustee usually prepares the post-bankruptcy return, he is not obliged to do so. Unlike your pre-bankruptcy tax return (which the Trustee must prepare and file), the responsibility for filing the post-bankruptcy return is actually yours rather than the Trustee’s.

Prior Year Tax Refunds

Moreover, any income tax refunds resulting from prior taxation years would also be sent to your Trustee by CRA. For example, let’s say that after you filed bankruptcy in 2020 you were re-assessed by CRA for the 2012 taxation year and that reassessment resulted in an income tax refund for 2012. The 2012 income tax refund would be sent to your Trustee as well.

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