New Bankruptcy Rules and Tax Debts

On September 18, 2009, a series of amendments to the Bankruptcy and Insolvency Act (the Act) came into force. One of those amendments affects individuals with large tax debts to the Canada Revenue Agency. The amendments offer a different procedure for seeking a discharge than bankrupts without a large tax debt.

There are two conditions that must be satisfied for section 172.1 of the Act to apply. First, the individual owes more than $200,000, including interest and penalties, in income tax liability; any liability that resulted from an assessment for director’s liability is not counted for the purposes of the application of this section. Second, the tax debt represents at least 75% of their unsecured credit.

If section 172.1 applies, a first-time bankrupt can apply for a discharge after 9 months only if the taxpayer has not been required to pay surplus income to the estate. Otherwise, the bankrupt cannot apply for 21 months after filing for bankruptcy. For non-first-time bankrupts, they can only apply 24 months (if they have not been required to pay surplus income to the estate) or 36 months (in all other cases) after filing for bankruptcy.

Section 172.1 also gives bankruptcy judges the discretion to order a discharge on the condition that additional funds are paid to the Canada Revenue Agency (CRA). The Act states that in exercising their discretion, the judge must take into account the circumstances that caused the tax liability to arise, any attempts made by the taxpayer to pay CRA prior to filing for bankruptcy, and the individual’s future financial prospects.