Insolvency Update - January 2006
1. - Tax Returns for Bankrupt Individuals
As the personal income tax filing season is rapidly approaching, we find ourselves fielding numerous enquiries form accountants, lawyers dealing in family law, and from clients, in regards to how tax returns have been filed during the year of bankruptcy. The bankruptcy date acts as a cutoff for personal tax purposes. This is required mainly because many debtors owe Canada Revenue Agency (CRA) money and the exact amount needs to be determined as at the bankruptcy date. As a result the income tax year is split into tow time periods.
i) Pre-bankruptcy - this tax return covers the period from January 1 to the date of bankruptcy. Any tax owing is stayed by the bankruptcy. Any tax refund is first kept by CRA to offset debt. If no tax debt exists, the refund is sent to the trustee for distribution to creditors.
ii) Post-bankruptcy - this tax return covers the period from the day after the bankruptcy to December 31st. Any tax owing for this period is new debt and survives the bankruptcy proceedings. If there is a tax refund, it is forwarded to the trustee for distributions to creditors.
Filing two tax returns that relate to the same calendar year seems to generate confusion about annual income. In order to determine annual income, simply add together the income from the pre and post bankruptcy tax returns.
2) Changes coming to the Bankruptcy and Insolvency Act
In the September 2005 Insolvency Update we mentioned that changes to the Bankruptcy and Insolvency Act (BIA) were coming in the form of BIll C55. The approval of those changes made it through Parliament just before the election was called and are scheduled to come into effect June 30, 2006.
One of the proposed changes that will significantly impact individuals is a new requirement for payments to automatically continue for 21 months as opposed to 9 months when surplus income exists. Surplus income, sometimes referred to as excess income, is determined in the BIA. When income exceeds the threshold, a minimum of 50% of the surplus is to be paid to the trustee for the benefit of the creditors. The thresholds are adjusted each year for the consumer price index changes. The current thresholds in use are as follows:
- Household of 1 person - take-home pay of $1,713
- Household of 2 person - take-home pay of $2,141
- Household of 3 person - take-home pay of $2,622
- Household of 4 person - take-home pay of $3,223
As a result, it would be "less expensive" for a person with surplus income to make a voluntary assignment into bankruptcy prior to June 30, 2006.
If you would like further analysis and commentary of the content of Bill C55, please visit www.bankruptcycanada.com
Readers are cautioned that the preceding information is not intended to provide specific advise. Readers should contact us if you would like to be removed from our mailing list, or if you would prefer to receive this via email.
As always, please feel free to contact myself or one of our courteous staff with any questions.
Derek L. Chase, CA, CIRP
Trustee in Bankruptcy
Useful websites for anonymous information:
www.BankruptcyCanada.com
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