How bankruptcy affects your income taxes

If you've run into financial problems and have filed for bankruptcy, discover how this will affect your income taxes.

Declaring bankruptcy can affect your life in some major ways.

• Once you've declared bankruptcy, you can take control of your life, and get a fresh start.
• If you’ve identified yourself as bankrupt, you’re now headed toward a more responsible financial future. And part of that future involves paying your taxes.

Here are some important things you need to know before tax time comes around.

Whether it’s student loan debt, credit card debt that spiraled out of control or even income tax debt you could never keep up with, declaring bankruptcy is a way to get a new beginning.

• Bankruptcy is defined as a legal process performed by Industry Canada under the Bankruptcy and Insolvency Act.
• It allows you to be cleared from most of your debts.
• When you file for bankruptcy, the trustee manages your property and assets. What this can mean is that the trustee sells the assets and deposits the money in trust for your creditors.

Before you deal with income tax, you have to first deal with your debt. Once your debt becomes too overwhelming, it’s time to consider your options.

There are the steps you need to take to declare bankruptcy.

1. Find a bankruptcy trustee. A trustee in bankruptcy is licensed to help you navigate through the complexities of the bankruptcy process. Your trustee will review your options with you, including alternatives to bankruptcy.
2. File for bankruptcy. Once you decide to proceed with declaring bankruptcy, your trustee will help with the required forms and other paperwork. Your trustee will help you complete the form DC905 Bankruptcy Identification Form.
3. Trustee will file outstanding tax returns. Your trustee will also need to a file pre-bankruptcy return, which is a tax return for the period from January 1 up to the day before the date of bankruptcy. The trustee might also file an in-bankruptcy return to report income from liquidated assets (to pay creditors).
4. File a post-bankruptcy return. This is a tax return from the date of your bankruptcy to the end of the year (December 31).

If any of your tax returns from the previous years give you a refund, that amount becomes property of the trustee.

• The trustee will take that amount and set it aside in the trust for your creditors.
• Any refund amount for the year of your bankruptcy is also sent to your trustee. Only refunds issued post-bankruptcy will be sent to you.

Remember, you can always contact the Canada Revenue Agency if you have any other tax concerns.