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Bankruptcy helps absolves consumers from various types of debt, but does bankruptcy clear tax debt in Canada? 

Bankruptcy is a very drastic debt relief solution, but around 100,000 people a year file for bankruptcy in Canada. Moreover, not all of your debts are released during bankruptcy, and there are certain exemptions and other rules you should be aware of. 

If you’re struggling with tax debt, it’s important to ensure whether bankruptcy will eliminate tax debt in Canada.

Does Bankruptcy Clear Tax Debt In Canada?

While bankruptcy is often filed by people who have large credit card debts, bankruptcy is an option for anyone with any type of unsecured debt such as personal loans and tax debt. Despite what many people think, tax debt is a form of unsecured debt and thus, will be eliminated after bankruptcy.

Types Of Tax Debt Eligible For Forgiveness

All types of tax debts, income tax, liability, GST/HST, and deductions will be discharged, this means you won’t owe the CRA once your bankruptcy is complete.

However, the rules and bankruptcy law are a little bit stricter for those who owe more than $200,000 in tax debt. Even so, there is a good chance your debts will still be forgiven during the bankruptcy. However, an automatic discharge will not be an option for you. If this represents your situation, you need to speak to an expert.

Types Of Tax Debt Not Eligible For Forgiveness

Government overpayments, which often come from social assistance or employment insurance, is one form of debt that sometimes cannot be included in a bankruptcy. Some of these debts could potentially follow you even after bankruptcy. 

This, of course, depends on how the overpayment is handled. Again, if you are unsure about your situation, you should speak with an expert about your situation.

Am I Eligible For Tax Debt Relief Through Bankruptcy?

If you can’t afford to pay your taxes, you may be able to get rid of this debt by filing for bankruptcy. You can include most tax debts in bankruptcy, though there are some exceptions. It’s important to understand how the process of removing tax debt through bankruptcy works and how your specific situation may affect it.

An exception that may deem you ineligible to eliminate your tax debt through bankruptcy is if you have more than $200,000 in tax debt that represents at least 75% of your entire unsecured debt. In this case, you would not be eligible for an automatic bankruptcy discharge. Instead, you’ll need to go to court to have your bankruptcy discharged.

If you’re required to attend a special hearing, the courts can do any number of things, including the following: 

  • Grant a discharge
  • Impose conditions that must be met before discharge 
  • Suspend the discharge for a certain amount of time  
  • Suspend the discharge along with conditions
  • Deny the discharge 

It should also be noted that your tax debt will not automatically go away through bankruptcy if the Canada Revenue Agency (CRA) has already secured the debt through a lien before filing. Declaring bankruptcy won’t remove the lien.

Who Is Eligible?

Before filing for bankruptcy, consider whether your situation warrants this drastic debt relief option. More specifically, the courts will consider the following factors:

  • Your personal situation
  • Potential causes of bankruptcy
  • Types of debt involved (such as secured or unsecured)
  • Amount of debt outstanding 
  • Whether or not another debt relief option may be better (such as a consumer proposal)
  • History of bankruptcy filings
  • Your history of tax filings

Other Requirements To Qualify For Bankruptcy

If you have tax debts and want them to be discharged during your bankruptcy, there are a few things that you need to do. Firstly, you’ll need to file all of your unfiled tax returns from previous years. This is done to confirm that you’re actually in debt to the government, and determine how much you owe exactly.

Next, your trustee will make sure that the CRA has not placed any liens on any of your assets (such as a house or vehicle) or that any of your bank accounts have not been frozen.

How Will A Bankruptcy Affect Your Credit? 

When you file for bankruptcy, there will be a remark on your credit report for 6 – 7 years after being discharged from bankruptcy. You’ll also receive a credit rating of R9, which is the lowest credit rating. This can negatively affect your credit scores and impact your ability to qualify for a loan in the future. 

While you can improve your credit after bankruptcy, it’s important to check your credit score and ensure the remark is removed after 6 – 7 years. 

Will Bankruptcy Clear Your Tax Debt In Canada: How The Courts Decide

Every person’s financial circumstances are different, and the courts will take each situation into careful consideration. Here are a couple of examples of how different situations can vary a great deal from one person to another, which the court will consider:

Leniency 

In some cases, the courts may practice some degree of leniency when determining how to rule on a person’s bankruptcy case. For instance, the courts may determine that only a small portion of the income tax principal would be enough to come up with a fair arrangement. This would relieve the bankrupt person of enough debt while still requiring them to be a responsible member of society. 

Protecting The Bankruptcy Process 

On the other end of the spectrum, the courts may take a more stringent approach to protect the integrity of the bankruptcy process. For instance, if a person has already filed for bankruptcy in the past, the courts may require the individual to repay their entire outstanding debt. In this case, a harsher ruling would hopefully discourage the person from getting themselves in a position to file bankruptcy again in the future.  

Check out how owing taxes to the CRA affects your credit score.

Does Bankruptcy Clear Tax Debt: Things To Consider

As mentioned, tax debt can be included in your bankruptcy. However, before you file for bankruptcy to alleviate your tax debt, consider the following factors: 

Are You Insolvent? 

The CRA will review your situation in detail if you file for bankruptcy. You can get relief from your tax debt through bankruptcy, though an existing tax lien on your home placed by the CRA may complicate things. Otherwise, bankruptcy is a viable option to alleviate your tax debt if you are unable to pay those debts.

CRA Can Ask For A Creditors Meeting

The CRA may require additional information about you and your situation. In this case, they may require a creditors meeting, especially if there’s evidence to suggest that you haven’t made a valiant effort to file your tax returns or make other types of debt repayments before filing for bankruptcy.

How Much Tax Debt Do You Have? 

If your outstanding tax debt exceeds $200,000 and makes up over 75% of your entire unsecured debt, this could complicate your bankruptcy proceedings. 

Under normal circumstances, you may be eligible for an automatic discharge from bankruptcy. But with a tax debt load totalling over $200,000 that comprises at least three-quarters of your total unsecured debt, you’ll have to attend court. A judge will then determine how and when you may be discharged from bankruptcy.

No More Tax Refunds 

If you declare bankruptcy with outstanding tax debt, you’ll lose tax refunds up to the year of filing. A history of unpaid taxes likely means you haven’t had any refunds in years past. And even if you do, these refunds owing to you — up to the year you declare bankruptcy — will be withheld by the CRA or kept by the trustee as a bankruptcy asset. 

Bankruptcy Won’t Remove Tax Liens

Filing for bankruptcy will not get rid of any tax liens you may already have. A lien registered against an asset makes outstanding taxes a secured debt. Since bankruptcy deals only with unsecured debts, filing for bankruptcy won’t remove a CRA lien on a property. 

Does Bankruptcy Clear Tax Debt: Yes, But Are There Other Options?

Sometimes, bankruptcy is the best option for getting out of your tax (and other) debts. However, before choosing bankruptcy, you should consider other less severe options like:

Alpine Credits

Consolidate With A Home Equity Loan

If you’re a homeowner with built-up equity, consider consolidating your debt with a home equity loan. Home equity loans have lower interest rates than credit cards and personal loans because it’s backed by your home. With lower interest rates and a longer payment period, your debt payments may be more manageable. 

Moreover, qualifying for a home equity loan is easy with lenders like Alpine Credits. No credit checks are required and there are no income requirements. Instead, they base their approval on the equity available in your home.

Consumer Proposal

You can use a consumer proposal to eliminate your tax debt in Canada. Like bankruptcy, a consumer proposal is a debt relief solution for unsecured debts. With a consumer proposal, your licensed insolvency trustee will work with your creditors to come up with a proposal. 

Within your consumer proposal, you’ll agree to pay back a specific amount of the total debt you owe them and your creditors agree to forgive the rest. It is a legally binding agreement that will provide you with protection from debt collectors.

Payment Arrangements

If you’re unable to pay your tax debts right away, you can arrange a payment schedule with the CRA. This will allow you to pay off your tax debt over a period of time. However, in order to do so, you need to be able to show the CRA that you have tried and failed to pay off the tax debt.

If your request is accepted, the CRA will review your finances and determine a payment plan that works for you and them. Failure to pay can result in wage garnishment and seizure of assets.

Waived Interest And Penalties

Depending on your situation you may be granted some leniency. If the CRA deems your case special, you may have your tax penalties and interest waived. However, it’s important to remember that they will not relieve you of your entire debt.

To receive this leniency, you must be able to show the CRA why your situation is special. Some circumstances that may warrant relief include the death of an immediate family member, a serious injury or illness, natural disasters (i.e: a fire), or a civil disturbance.

Depending on your financial situation any one of the mentioned options can help you with your tax debt. 

Does Bankruptcy Clear Tax Debt In Canada: Bottom Line

Yes, bankruptcy can clear your tax debt in Canada, however, there are exceptions to the rule. As such, when it comes to tax debt and bankruptcy, it’s important to speak with a professional. A Licensed Insolvency Trustee can help you create a plan to deal with your debt. Having the right expert on your side is the best way to conquer your debt and finally build a debt-free life. 

Does Bankruptcy Clear Tax Debt: FAQs

Can you declare bankruptcy on CRA debt?

You can eliminate your tax debt when you file for bankruptcy, as well as other unsecured debt. However, there are some exceptions, including if you owe more than $200,000 in tax debt. 

Can the CRA garnish my wages?

Yes, the CRA can garnish your wages if you are past due on your taxes owing. The CRA has a lot of power, particularly when it comes to handling unpaid and overdue taxes, and garnishing wages is just one of many actions they can take. 

Can filing a consumer proposal get rid of tax debt?

Yes, a consumer proposal can provide debt relief from the CRA. Tax debt can be included in a consumer proposal, and the CRA may accept less than the full amount you owe, depending on your situation. But to get the CRA to accept your consumer proposal, you’ll need to file any outstanding tax returns. 
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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