Christmas is an especially challenging time of the year for people struggling with debt. At your initial consultation with a Licensed Insolvency Trustee, your Trustee should have explained how taxation works in relation to bankruptcy.
When you file an assignment into bankruptcy your trustee is required, at a minimum, to complete a “pre” bankruptcy return for the year of your bankruptcy as well as for the year immediately preceding the year of your bankruptcy (called a “prior” year return). However, most Trustees will also file your “post” return and other outstanding returns they believe will generate refunds.
The “pre” bankruptcy return is for the portion of the year up to the date of your bankruptcy filing. The idea of filing a “pre” return is that if you owe any tax debt to CRA it will be dischargeable in your bankruptcy, because it is a debt that was incurred before you went bankrupt. The “post” return is for the remainder of the year following the date of bankruptcy up to, and including, December 31st.
When you hear the term “prior” it refers to any year preceding the year in which the bankruptcy was filed. If you filed for bankruptcy in June of 2021, but had not filed tax returns for 2020 or any other years “prior” to 2020 those returns would each, be “prior” bankruptcy returns.
What does all of this have to do with Christmas? Any tax refunds to which you are entitled up to the date of bankruptcy are considered to be “assets” and since all of your “assets” vest in (belong to) your Trustee for the benefit of your creditors – your Trustee will receive the refunds, if any.
Christmas time is a time for family holidays and shortened work weeks. If you are thinking about filing for bankruptcy at Christmas time, but wait until the new year, the new year becomes the year of bankruptcy and is split into a pre and post period. For some people this can be a critical issue since most Trustees also take an assignment of the post return, meaning that you will not only lose the benefit of a tax refund for 2020 but you will also lose the 2021 refund.
If you are contemplating filing a bankruptcy, it may benefit you to file before the end of the year rather than wait. For more information call us at 519-646-2222