What happens to my income tax refund?

What happens to your income tax refund? The Canadian Income Tax Act requires your Licensed Insolvency Trustee to file your personal income tax return for the year in which you filed bankruptcy. For example, if you filed bankruptcy in 2013, she will have to prepare and file your 2013 tax return.

Continuing this example, any income tax refund resulting from the 2013 tax return would be sent to your bankruptcy trustee by the Canada Revenue Agency (“CRA”). The reason why this is so is that your income tax refund is considered an “asset”, and accordingly, that asset has to be remitted to the trustee by CRA. The income tax refund is deposited by the trustee into her trust account for the benefit of your creditors.

Now to get into more detail – continuing the above example, with respect to the 2013 income tax return prepared by the Licensed Insolvency Trustee, he will need to prepare two separate returns:

• A pre-bankruptcy income tax return, which cover the period from January 1st 2013 up to the actual bankruptcy date. If you owe money on this tax return, this tax debt will be discharged in your bankruptcy proceedings because it’s considered debt existing on the date of bankruptcy; and

• A post-bankruptcy income tax return, which will cover the period from the day after you filed bankruptcy to December 31st 2013. If you owe money on this tax return, you will be liable to pay it since it’s considered “post-bankruptcy” debt. If there is a refund resulting from this return, it will be sent to the Licensed Insolvency Trustee as an “asset” of your bankruptcy estate.

Moreover, any income tax refunds resulting from prior taxation years would also be sent to your trustee by CRA. For example, let’s say that after you filed bankruptcy in 2013 you were re-assessed by CRA for the 2009 taxation year and that reassessment resulted in an income tax refund for 2009. The 2009 income tax refund would be sent to your trustee as well.