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Canada Bankruptcy & Insolvency Tax Guide

the bankruptcy and the insolvency tax rules in Canada. The bankruptcy and the tax debt — the CRA is the creditor in the bankruptcy (the "unsecured creditor" for the most tax debts). The deemed trust — the CRA has the "deemed trust" over the source deductions (the CPP, the EI, the income tax deducted from the employee's wages) — the deemed trust gives the CRA the "super-priority" over the other creditors. The consumer proposal — the "proposal to the creditors" — the "debt settlement" — the "CRA acceptance" of the proposal. The CRA generally accepts the "standard" consumer proposal (the "CRA's policy" — the "CRA will accept the proposal if the proposal is the 'better alternative to the bankruptcy'"). The bankruptcy and the tax refunds — the "pre-bankruptcy refund" (the tax refund for the year before the bankruptcy) is the property of the "trustee in bankruptcy" (the "trustee claims the refund"). The "post-bankruptcy refund" (the tax refund for the year after the bankruptcy) is the property of the bankrupt (the "bankrupt retains the refund"). The bankruptcy and the RRSP — the RRSP is generally protected from the bankruptcy (the "RRSP exemption" under the "Bankruptcy and Insolvency Act" — the "Registered Retirement Savings Plan" is NOT the property of the bankrupt for the bankruptcy purposes). The bankruptcy and the TFSA — the TFSA may NOT be protected from the bankruptcy (the "TFSA exemption" is NOT the same as the RRSP exemption — the TFSA is the property of the bankrupt for the bankruptcy purposes). The bankruptcy and the capital losses — the "capital loss carry-forward" is restricted in the bankruptcy — the "bankruptcy loss restriction" (the losses from the pre-bankruptcy years cannot be carried forward to the post-bankruptcy years).

Bankruptcy & Tax Debt

• CRA as the creditor: The CRA is the "unsecured creditor" for the income tax debt, the GST/HST debt, and the payroll debt (the source deductions). The CRA files the "proof of claim" in the bankruptcy (the "CRA's claim" — the "amount of the debt" — the "pre-bankruptcy debt").
• Deemed trust (source deductions): The CRA has the "deemed trust" over the source deductions (the CPP, the EI, the income tax deducted from the employee's wages). The deemed trust gives the CRA the "super-priority" over the other secured creditors (the "CRA's priority" — the "deemed trust" under s. 227(4) of the ITA).
• GST/HST deemed trust: The CRA also has the "deemed trust" over the GST/HST collected by the bankrupt (the "GST/HST deemed trust" — the "net tax" collected from the customers).
• Directors' liability: The director of the corporation is personally liable for the unpaid source deductions (the "director's liability" — the "director's assessment" — the "CRA can assess the director for the unremitted source deductions").

Consumer Proposal

• Proposal to the creditors: The "consumer proposal" is the formal debt settlement (the "proposal to the creditors" — the "debt compromise" — the "offer to pay a portion of the debt"). The consumer proposal is administered by the "Licensed Insolvency Trustee" (the "LIT").
• CRA acceptance: The CRA generally accepts the "standard" consumer proposal (the "CRA's policy" — the "CRA will accept the proposal if the proposal is the 'better alternative to the bankruptcy'"). The CRA considers the "commercial reasonableness" of the proposal.
• Tax debt in the proposal: The CRA's tax debt (the income tax, the GST/HST, the payroll) can be included in the consumer proposal (the "CRA debt in the proposal" — the "CRA accepts the proposal" if the proposal is the "best alternative to the bankruptcy").

Bankruptcy & Registered Plans

• RRSP exemption: The RRSP and the RRIF are generally EXEMPT from the bankruptcy (the "BIA exemption" — the "Bankruptcy and Insolvency Act" — the s. 67(1)(b.2) — the "RRSP and the RRIF are not the property of the bankrupt"). The exception: the contributions made in the 12 months before the bankruptcy are NOT exempt (the "12-month contribution clawback").
• TFSA: The TFSA is NOT exempt from the bankruptcy (the "TFSA is the property of the bankrupt" — the "trustee can seize the TFSA"). The TFSA is treated as the "investment account" for the bankruptcy purposes (the "TFSA is not protected by the BIA").
• CPP and OAS: The CPP and the OAS benefits are generally protected from the bankruptcy (the "social benefits" — the "government benefits" — the "exempt property").

For the CRA debt collection and the payment plans, see our Tax Debt Collection Guide →. For the CRA taxpayer relief and the interest relief, see our Tax Audit & Appeals Guide →.