May 23, 2024 in Bankruptcy, Consumer Proposal

CRA Tax Debt and Personal Bankruptcy Alberta

CRA tax debt bankruptcy

How does CRA Tax Debt Affect and Influence Personal Bankruptcy for Albertans

Bankruptcy in Alberta, governed at the Federal level, by the Bankruptcy and Insolvency Act (“BIA”) represents a legal procedure that can be initiated when individuals cannot meet their debt obligations as they generally fall due. It starts with an assignment filed by the debtor, to legally resolve their debt issues as provided by the BIA.  When Albertans struggle with insurmountable debt, including obligations to the Canada Revenue Agency (CRA) for various debts resulting from unpaid income taxes, GST or source deduction remittances, garnishment, or penalties, filing for bankruptcy or a consumer proposal can emerge as a solution for dealing with these debts.

Tax refunds, penalties, and debt consolidation options interact with the principles of creditors’ rights and insolvency in unique ways, framing the legal and financial considerations Albertans must consider when debt exceeds capacity. As such, exploring bankruptcy or a consumer proposal, CRA tax debt relief, and alternative debt management strategies becomes essential for those seeking to alleviate fiscal stress while understanding the potential impact on future financial health.

Understanding Bankruptcy in Alberta

Bankruptcy in Alberta operates under the BIA which is a Federal Act.  The BIA outlines a structured legal process for those unable to meet their debt obligations. This process typically involves the transfer of most of the debtor’s assets to a bankruptcy trustee (formally knows as a Licensed Insolvency Trustee or LIT), who then allocates the proceeds to creditors. However, not all assets are transferred to the LIT as they are protected under various Provincial, Territorial, or Federal laws or may be secured against loans.

Key Aspects of Bankruptcy in Alberta:

  1. Duration and Discharge: The minimum period for bankruptcy is 9 months for a first time bankrupt who is not in surplus (21 months if in surplus) and 24 months for a second time bankruptcy who is not in surplus (36 months if in surplus), after which an individual may be eligible for automatic discharge, depending on their specific circumstances and adherence to their duties imposed on them.. Surplus income is a defined calculation established by the Office of the Superintendent of Bankruptcy (“OSB”) that establishes the amount one will pay in a bankruptcy based on whether or not you exceed an established low income threshold that is set annually by the OSB.  Your Trustee will explain this calculation during your consultation and review you’re your options.


  1. Non-dischargeable Debts: It’s important to note that bankruptcy does not clear all types of debts. Obligations such as alimony, child support payments, student loans less than 7 years old, court-imposed fines, and debts incurred through fraud are not discharged through bankruptcy.
  2. Exempt Assets: In Alberta, certain assets are exempt from seizure during bankruptcy. These include essentials like your equity in a home (up to $40,000), a personal use vehicle (up to $5,000), all RRSP’s and RESP’s, locked-in pension plans, and necessary household items and personal effects (up to $4,000 each). A more comprehensive list of exemption can be found in the Civil Enforcement Act of Alberta.


  1. Asset Valuation and Exemption Limits: For assets that exceed the exemption limits, arrangements can be made with the Trustee to pay for those assets, should you wish to retain them.

For those facing overwhelming debt, consulting with a Licensed Insolvency Trustee can provide necessary guidance and options.

How does the CRA treat tax debts on those who declare bankruptcy?

When individuals in Alberta declare bankruptcy, the treatment of their tax debts by the Canada Revenue Agency (CRA) follows specific legal protocols. Under the BIA, tax debts are generally included in the bankruptcy process, which means that they can be discharged upon the successful completion of bankruptcy proceedings However, there are important points to consider:

  1. Priority of Tax Debts: Tax debts to the CRA are treated like other unsecured debts such as your charge cards and lines of credit. An exception to this is where you owe for unpaid source deduction remittance for employees that were incurred by virtue of you operating as a sole proprietor.  CRA can continue to seek collection of these amounts until such time as you are discharged from your bankruptcy.  If you owe more than $200,000 of personal income tax debt, there is no automatic discharge available to you and a Court Ordered Discharge must be obtained.


  1. Exceptions to Discharge: Certain types of tax debts, such as those resulting from fraud, are not automatically discharged through bankruptcy. Debtors must be aware that these obligations might persist even after other debts have been resolved.


  1. Filing Requirements: It is mandatory for bankrupt individuals to file all required tax returns up to the date of bankruptcy and for any prior years that were not filed. The CRA assesses these returns to determine the accurate amount of tax debt owed.


  1. Potential Legal Actions: In cases where a tax debts is involved, the CRA may take legal action against a debtor prior to the assignment in bankruptcy which may include the garnishment of wages and salaries, the registration of a lien on your real property, the issuance of a requirement to pay that can be issued to your clients directing them to remit any amounts owing to you to them, and seizure of your bank account.

These points illustrate the complex relationship between bankruptcy and tax debts as managed by the CRA, highlighting the importance for individuals to seek comprehensive guidance from an LIT to navigate these challenges effectively.

What is CRA Tax Debt Relief?

The Canada Revenue Agency (CRA) provides options for taxpayers to manage and relieve their tax debts, ensuring flexibility and support during financial hardships. These programs are designed to help individuals fulfill their tax obligations over a manageable period without overwhelming financial strain.

Payment Arrangement Options

Pre-Authorized Debit Agreements: Taxpayers can set up a payment plan using pre-authorized debit, allowing them to make regular payments towards their tax debt directly from their bank account.

Relief from Penalties and Interest

Criteria for Relief: The CRA may consider relieving penalties and interest for taxpayers who face events beyond their control, which prevent them from meeting tax obligations.

Application Process: Requests for relief must be submitted in writing, detailing the circumstances and providing necessary supporting documents.

Consumer Proposals and Tax Debt

Consumer Proposal Benefits: Unlike bankruptcy, a consumer proposal allows individuals to retain possession of their assets while dealing with debts. It is legally binding on all creditors, including the CRA, and typically results in debt forgiveness for less than the full amount owed.

CRA’s Role in Consumer Proposals: The CRA accepts consumer proposals as a viable debt resolution method, especially when the debtor is financially unable to repay their tax debt in full.

Considerations for Tax Debt Relief

  1. Full Disclosure Requirement: It is crucial for taxpayers to provide full disclosure of their assets when administered by a LIT through a bankruptcy or consumer proposal.
  2. Non-Acceptance of Informal Settlements: The CRA does not accept informal debt settlements or repayment plans arranged through counseling agencies. CRA cannot negotiate a settlement of the income taxes owed with you directly.  They will only compromise the amount owing through either a bankruptcy or proposal.

These relief options underscore the CRA’s commitment to providing support for taxpayers under financial duress, ensuring that they have viable paths to manage and overcome their tax liabilities.

Tax Debt and Its Implications on Bankruptcy

Tax debt significantly influences the bankruptcy process, often leading to the discharge of these debts under certain conditions. However, complexities arise for high-tax debtors. Those whose tax arrears exceed $200,000 and account for more than 75% of their total proven debts do not qualify for an automatic discharge. Such cases require a special hearing where the Court exercises broad discretion, potentially issuing a conditional discharge based on the debtor’s ability to pay a reasonable amount towards their debts.

Court Considerations for Conditional Discharge

The Court evaluates multiple factors to determine a fair discharge plan:

  • Causes of bankruptcy
  • Debtor’s personal and family circumstances
  • Nature and amount owed to creditors
  • Feasibility of a consumer proposal as an alternative
  • Debtor’s prior bankruptcy or consumer proposal history
  • Compliance with tax obligations before and after bankruptcy

Tax Compliance and Bankruptcy

Tax compliance plays a role in bankruptcy proceedings. Courts assess whether bankrupt individuals have fulfilled their tax obligations by filing all required returns and making efforts to settle assessed tax debts. This compliance significantly impacts the Court’s decisions regarding discharge conditions.

Common Causes and Resolutions of Tax Debts

Tax debts are a prevalent reason for financial distress leading to bankruptcy. In Canada, tax-related debts can be resolved through bankruptcy or a proposal.  Exceptions include debts from falsified tax returns or repeated tax-driven bankruptcies.  Additionally, specific types of tax obligations, such as personal GST and unpaid employer remittances, are generally dischargeable unless associated with fraudulent activities.

Impact of Bankruptcy on Future Tax Claims

Bankruptcy affects future tax claims, as it results in the loss of several tax benefits like loss or expense carryforwards, which cannot be claimed in subsequent tax years. The fiscal year of bankruptcy is split into pre and post-bankruptcy periods, necessitating separate tax returns for each.

Interaction with Consumer Proposals

Filing a consumer proposal impacts CRA actions by halting wage garnishments and allowing the inclusion of other unsecured debts in the arrangement. This provides a structured path for debtors to manage their financial obligations without the full implications of bankruptcy.

The Role of Licensed Insolvency Trustees in Alberta

Licensed Insolvency Trustees (LITs) in Alberta play an important role in managing financial distress by offering a range of services designed to address overwhelming debt. These federally regulated professionals, licensed by the Office of the Superintendent of Bankruptcy, are the only individuals authorized to administer bankruptcies and consumer proposals in Canada.

Services Provided by LITs

  • Consumer Proposals: Only LITs can file consumer proposals, allowing debtors to avoid bankruptcy by agreeing to pay a portion of their debts.
  • Bankruptcy Filing: If bankruptcy is the chosen or necessary route, only LITs can handle the filing and administration process.
  • Credit Counselling: LITs provide essential credit counselling services to help debtors manage their finances better and understand the implications of their financial decisions.

Responsibilities of LITs

  • Asset Management: LITs assess and may liquidate the debtor’s assets if required or if you do not wish to retain those assets, ensuring that the proceeds are distributed fairly among creditors.
  • Credit Negotiation: They negotiate with creditors to reach a debt settlement that respects the financial capacity of the debtor.
  • Legal Compliance: LITs ensure that all legal requirements are met, including the submission of proper documentation and the fulfillment of duties by the debtor.
  • Financial Guidance: They guide debtors through the bankruptcy process, advising on matters like surplus income and asset disclosure.

Impact on Debt Resolution

LITs significantly influence the outcome of debt resolution strategies by ensuring that both the debtor’s and creditor’s rights are respected, facilitating a fair and transparent process. Their role includes stopping any ongoing wage garnishments and protecting debtors from further legal repercussions initiated by creditors.

By providing these services, Licensed Insolvency Trustees in Alberta not only help individuals regain financial stability but also ensure that creditors recover a fair portion of owed debts.

Alternatives to Bankruptcy for Managing Tax Debt in Alberta

Money Mentors, a non-profit credit counselling organization in Alberta, offers a comprehensive range of services tailored to assist individuals in managing their debts without resorting to bankruptcy. These services include debt help, orderly payment of debts (OPD) programs, debt consolidation, credit counselling, financial education, and money coaching.

Orderly Payment of Debts (OPD) Program

Money Mentors is the exclusive provider of the federally legislated OPD program in Alberta. This program consolidates all debts into a single monthly payment at a fixed interest rate of 5%, making it a structured and manageable way to tackle debt.

Debt Consolidation and Management Programs

Debt consolidation loans and debt management programs present informal alternatives to bankruptcy. These options help individuals pay back most or all of their debt at a lower interest rate.

Impact of Bankruptcy on Your Financial Future in Alberta

Bankruptcy significantly affects an individual’s credit score and financial opportunities in Alberta. When someone files for their first bankruptcy, this remains on their credit report for six years post-discharge. If it’s a second bankruptcy, the impact extends up to 14 years. This can severely reduce one’s credit rating, influencing future financial decisions such as renewing mortgages or acquiring new loans.

Rebuilding Credit Post-Bankruptcy

Post-bankruptcy recovery includes:

  • Verify Credit Report Accuracy: Ensure that all information on your credit report is correct.
  • Secured Credit Cards: Apply for a secured credit card and use it responsibly to begin rebuilding trust with financial institutions.
  • Consider Financing Options: Look into loans for RRSPs or vehicle financing to demonstrate financial responsibility and capability.

Financial Management Post-Bankruptcy

Adopting robust financial habits is essential after bankruptcy:

  • Maintain Low Credit Balances: Keep your credit card balances low to manage repayments more effectively.
  • Automate Payments: Set up automatic payments to ensure timely bill management, avoiding late payments that could affect your credit score.
  • Regular Credit Monitoring: Keep an eye on your credit report to catch any discrepancies early and track your progress in rebuilding credit.

Costs Associated with Filing for Bankruptcy

Bankruptcy not only impacts credit but also incurs various costs:

  • Court and Trustee Fees: Filing for bankruptcy involves certain fees set by the Office of the Superintendent of Bankruptcy, which are paid out of the amounts collected during your bankruptcy period based on a tariff established under the BIA.
  • Legal Representation Costs: Depending on the complexity of your case, you may need to hire a bankruptcy lawyer to assist you in the bankruptcy process, such as attending to Court to act on your behalf for a discharge involving a high tax debtor’s discharge adding to the overall cost.

Long-Term Impacts

Upon completion, bankruptcy clears most debts, providing a fresh financial start. However, it’s vital to remember the lessons learned and manage finances prudently to avoid future financial distress.

Steps to Take After Discharge from Bankruptcy

After being discharged from bankruptcy, individuals are released from the obligation to repay most of their debts, except for specific exceptions such as alimony, child support, and certain fines and penalties imposed by a Court.

CRA tax debt and personal bankruptcy in Alberta presents a complex challenge, requiring a thorough understanding of legal procedures, financial implications, and available relief options. The importance of strategic planning and professional guidance cannot be overstated, as these are key to effectively managing CRA tax debts and considering bankruptcy only when necessary.

For Albertans facing financial distress, the path forward involves not only addressing immediate obligations but also laying the groundwork for a stable financial future. By exploring consumer proposals, engaging with non-profit credit counselling organizations, and considering orderly payment programs, individuals can navigate their financial hardships with informed confidence. Ultimately, the goal is to achieve a balanced financial ecosystem, where debts are managed responsibly, and individuals regain control over their financial health, all while minimizing the long-term repercussions on their credit and lifestyle.