What is a personal income tax debt, income tax bankruptcy?

Personal income tax debt

A "personal income tax debt" is an amount payable, within the meaning of subsection 223(1) of the Income Tax Act, without reference to paragraphs (b) to (c), by an individual and the amount payable by an individual under any provincial legislation that imposes a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, including the amount of interest, penalties, or fines imposed under this act or the provincial legislation. It does not include an amount related to an obligation of a corporation for which an individual may be responsible as a director or former director of this corporation.

Section 172.1 of the Bankruptcy and Insolvency Act defines a tax debtor ("bankrupt") as follows:

[i]n the case of a bankrupt; an individual with $200,000 or more of personal income tax debt representing 75% or more of the total unsecured proven claims as well an assessment under section 160 of the Income Tax Act.

Such debtors generally include individuals who have voluntarily or deliberately omitted to file their annual income tax returns for several years. It can also include individual who were audited by a level of government and had certain deductions refused, leading to a new assessment for the audited years, plus penalties and interest.

When the amount owed by an individual is calculated, the amount for which an individual is or was a director of a corporation is liable as well as amounts payable for GST/QST and HST are not taken into consideration.

Discharge

A tax debtor cannot obtain an automatic or absolute discharge. An application for a hearing to discharge the tax debtor can be made only once the following periods expire:

1. In the case of a first bankruptcy:
   1. Nine months after the date of bankruptcy if the tax debtor has not been required to make payments of surplus income to the estate of the tax debtor at any time during those nine months
   2. Twenty-one months after the date of bankruptcy in any other case
2. In the case of a second bankruptcy:
   1. Twenty-four months after the date of the bankruptcy if the tax debtor has not been required to make payments of surplus income to the estate of the tax debtor at any time during those 24 months
   2. Thirty-six months in any other case
   3. Thirty-six months following the date of bankruptcy in any other case

Court hearing

Canada Revenue Agency has made it a policy to be present at all tax debt discharge hearings. Moreover, Canada Revenue Agency now systematically opposes all tax debt discharges.

Factors to be considered at the court at the hearing on the application for discharge

The court will consider the following factors when an application for discharge is made:

1. The circumstances of the debtor at the time the tax debt was incurred
2. The efforts made to pay the income tax debt
3. Payments of other debts while failing to pay the income tax debts
4. The debtor's financial prospects for the future

Possible court decisions

The court may make the following decisions at the hearing on application for discharge, depending on the case:

1. Refuse the discharge
2. Suspend the discharge for any period the court considers appropriate
3. Require the bankrupt, as a condition of discharge, to perform any acts, pay any monies, consent to any judgments, or comply with any other terms that the court may direct

Conclusion

Whenever practical, trustees will recommend that debtors file a proposal in order to settle all their debts.

SYLVIE LYONS, CIRP, Trustee

Sylvie Lyons is a trustee in bankruptcy with our Ottawa office located at 287, Richmond Road, Ottawa, Ontario K1Z 6X4, 613-729-4391.

For additional information on this topic or any other insolvency matter, please contact one of our trustees. The contact information and e-mail addresses of our professionals are available on our Web site at www.ginsberg-gingras.com.

Ginsberg Gingras & Associates Inc. is a member of the DFK Canada Inc., DFK International and is associated with the accounting firm of Ginsberg Gluzman Fage & Levitz, LLP Chartered Accountants.

** This article does not constitute any legal advice. It is offered for information purposes only. Since every case is different, the advice of a qualified professional should be sought in each situation. **