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Bankruptcy is a legal process that can discharge you from most unsecured debts. For many Canadians, it’s the last resort for dealing with unmanageable debt.
To file for Bankruptcy, you must be insolvent and have at least $1,000 in unsecured debt. A Licensed Insolvency Trustee (LIT) is the only professional in Canada who can administer formal debt relief solutions including Bankruptcies and Consumer Proposals.
If you’re dealing with significant tax debt from the Canada Revenue Agency (CRA), you might question whether it will go away in Bankruptcy. In most cases, it is included, however, there are some exceptions.
Here’s what you need to know about CRA tax debt and filing for Bankruptcy.
Types of CRA Debt
The CRA collects taxes on the following:
- Personal income tax. This is a percentage of your income that’s paid to the government each year.
- Corporate income tax. If you have an incorporated business then you’re responsible for paying corporate taxes.
- Payroll deductions. Payroll deductions include things like Employment Insurance (EI) and Canada Pension Plan (CPP).
- GST/HST. If you run a business, you may have to pay the government GST/HST.
If you fail to pay your taxes, payroll deductions or GST/HST, the CRA can come after you to collect.
What if I Don’t Pay CRA Debt?
If you’re unable to pay your CRA debt when it’s due, you can expect consequences which may include:
- Interest and penalties. You can expect to make interest payments on most unpaid balances. You might also have to pay a penalty if you file a late return or miss a payment deadline.
- Reduced benefits or refunds. If you receive benefits or you’re expecting a tax refund, the government can use this money to pay your debt.
- Legal action. Depending on your situation, the CRA can take different actions to collect such as garnishing your wages or seizing assets.
Before initiating legal action, the CRA will generally make three attempts to notify you by phone and send one written legal warning. If you own a business and owe payroll or GST/HST debt, the CRA can take legal action immediately after you are notified of your debt.
Does Bankruptcy Eliminate CRA Tax Debt?
In most cases, tax debt is treated like other unsecured debts and can be eliminated in Bankruptcy. However, there are some exceptions. For instance, fraudulent tax debts will not be discharged in Bankruptcy.
If you have $200,000 or more in personal income tax debt and this represents 75% or more of your unsecured debt, you aren’t eligible for an automatic discharge. When you have high tax debt, the situation becomes more complicated and your case will require additional review.
Will I Get My Tax Refund if I File For Bankruptcy?
If you file for Bankruptcy, any refunds issued from previous years are considered to be the property of your estate in Bankruptcy. Your refunds are sent to your LIT. The refunds you receive in the years after your Bankruptcy will go to you.
Alternatives to Bankruptcy
Filing for Bankruptcy is a serious financial decision. While the purpose is to bring relief to Canadians drowning in debt, there are challenges to consider. For instance, Bankruptcy will drop your credit score to a low rating, making it more difficult to borrow in the future. After declaring Bankruptcy, your LIT will sell your assets to collect money to distribute to your creditors. You can speak to your LIT to see if Bankruptcy is the right debt solution for you, or if you can pursue alternative options such as:
Tax debt payment plan
The CRA offers an opportunity to find some tax debt relief. To apply, you need to provide a detailed description of your circumstance and why you’re asking for tax-payer relief. You need to explain how your situation prevented you from paying your debts or filing your tax return on time.
For instance, if you lost your job, lost a loved one, or experienced a serious illness, you can request relief. You’ll have to provide documentation to support your situation.
You can submit your request online through your CRA My Account, My Business Account, or by mail or courier.
Consumer Proposal
In a Consumer Proposal, you work with a LIT to create an offer to your creditors. In your offer, you agree to pay a percentage of your debt, extend the time you have to pay, or both. If your proposal is accepted, you have up to five years to pay your debts. The benefit of a Proposal is that you only have to pay a portion of your debt and you can keep many of your assets.
Find Tax Debt Relief: Speak to a LIT
If you’re feeling overwhelmed with tax debt, or any kind of debt, speak to a Licensed Insolvency Trustee. A LIT is a debt professional who can assess your financial situation and recommend a path forward. Trustees are also the only professionals in Canada qualified to administer formal debt solutions including Bankruptcy and Consumer Proposals. To speak to a LIT call us at 1-888-371-8900 or fill in our online contact form. You don’t have to navigate your tax debt alone, we can help.
Frequently Asked Questions on Tax Debt Relief
If you ignore a tax debt, interest and penalties continue to accumulate. If you don’t contact the CRA or make payments, the agency can withhold tax refunds or benefit payments and may eventually take legal steps to collect what you owe, including garnishing wages or freezing bank accounts.
The CRA does not report tax debt directly to Canada’s major credit bureaus, so owing tax on its own generally won’t show up on your credit report. However, if the debt results in a court judgment or goes to a third-party collector, it could indirectly affect your credit.
Scams related to tax debt are common. The CRA does not ask for payment via pre-paid cards, gift cards, or odd payment methods. If you’re unsure, log into your CRA My Account or call the CRA directly using the official number on Canada.ca and not a number a caller gave you.
Yes, but the CRA won’t negotiate on your behalf unless you have formal authorization (like power of attorney). Also, paying a family member’s debt doesn’t automatically reduce interest or penalties; the full amount owing usually still applies.
Before any legal action, the CRA will generally try to contact you by phone and send written notices. You may be able to:
- Defer payments
- Set up a payment plan
- Apply for relief from interest/penalties due to hardship
Contacting the CRA early improves the chance of avoiding collections actions.
The CRA Taxpayer Relief program lets you request cancellation or reduction of penalties or interest if you experienced extraordinary circumstances such as severe injury, serious illness, or natural disasters that prevented you from paying on time.
Yes. The CRA can apply your tax refund or government benefits (like GST/HST credits or Canada Child Benefit) against your outstanding tax debt without requiring your consent.
A Notice of Assessment tells you how much tax you owe (or your refund), based on your return. A Reassessment happens when the CRA reviews and changes your return, this can create additional tax debt.
You should contact the CRA as soon as possible. They can often work with you on:
- Deferred payment dates
- Structured monthly payments
- Financial disclosure to determine your ability to pay
- Engaging early can prevent escalation.
Late filing usually triggers penalties (5% plus 1% per month up to a max) and interest on the balance owing. This adds to your total debt and grows daily until it’s resolved.
Find Tax Debt Relief: Speak to a LIT
If you’re feeling overwhelmed with tax debt, or any kind of debt, speak to a Licensed Insolvency Trustee. A LIT is a debt professional who can assess your financial situation and recommend a path forward. Trustees are also the only professionals in Canada qualified to administer formal debt solutions including Bankruptcy and Consumer Proposals. To speak to a LIT call us at 1-888-371-8900 or fill in our online contact form. You don’t have to navigate your tax debt alone, we can help.
