Anyone have knowledge ref: pre and post bankruptcy filing? This is my fist one. Any guidance is appreciated.
Pre-bankruptcy returns are required to be filed by the bankruptcy trustee. Some also file post-bankruptcy returns, but the taxpayer is often responsible to file them.
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Ditto @iain.fyffe
Unless you are a Licensed Insolvency Trustee (LIT), you aren’t allowed to file them.
Pre and Post bankruptcy returns are both for the year of bankruptcy and must be filed by the LIT. Tax returns for subsequent years can be filed by the taxpayer or a tax preparer, but must be filed on paper (can’t be EFILED) until the taxpayer has been DISCHARGED from bankruptcy (which may be automatic after a certain number of months, or may require going to court).
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I have filed the post bankruptcy returns more than once. I also had a situation where the bankrupt owed me money. The trustee insisted i file a tax return for the client so they paid me most of what the bankrupt owed me to file probably the last year before bankruptcy.
the POST-bankruptcy return? (which is the portion of the year from bankruptcy to the end of that year)
or the YEAR AFTER bankruptcy?
According to CRA and the various LITs I’ve dealt with, only the LIT can file the “post-bankruptcy return”, but the subsequent years are just normal tax returns - not called “post-bankruptcy returns”
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Thank you, now I know.
Sorry - I may only have filed a T1Adj for the return filed by the Trustee at the request of the trustee’s office. I could only send it by mail. Now months later, CRA is saying I was not authorized for that year. I am beginning to see a problem here!
From CRA site
It is your responsibility to file an income tax and benefit return for the post-bankruptcy period , which is from the date of bankruptcy to December 31, if the trustee does not file one on your behalf.
Information on bankruptcy - Canada.ca
I am contracted by certain LITs for pre and post bankruptcy returns.
If you are preparing the post bankruptcy return, you will need details from the pre bankruptcy return in order to file it. Equally, you will need to verify with the LIT as to the bankruptcy engagement if they are to receive the post bankruptcy refund, meaning that they are also responsible for the preparation of the same. There are a variety of rules involving who signs which returns as well.
The CRA and the Trustees’ association have removed from public the documents pertaining to the rules for bankruptcy returns. So it is primarily a “closed” shop.
Respecting @obhorst comment about filing, in general, the LIT will not take on a bankrupt client who has outstanding PRIOR returns, so insolvent individuals need to get these done before declaring bankruptcy. The reason is, if there are outstanding tax returns, the CRA will require the LIT to prepare and file the older returns. Get your cash up front, otherwise you become one of the creditors.
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@TimParris, since you are a contractor for LITs and have some additional experience that most of us don’t have, can I ask a question about what happens when someone dies and has outstanding, unfiled tax returns from prior years where they owed money to CRA.
I experienced this scenario during last year’s tax season. My client’s sister died and didn’t have a Will. My client applied to the courts and became the administrator of her sister’s estate. The sister had no assets and barely enough money to cover funeral costs, so my client paid out of her own money to allow her sister to have a nice funeral. When she asked me to finalize last year’s tax return and authorized me on RAC, I discovered that 2015 & 2017 were not filed, and when I created tax returns for those years entering the tax slips available on RAC, I discovered that not enough tax was withheld at source on her income and she would have owed over $10,000 had those returns been filed, which is probably why the sister chose not to file them! There were NO LETTERS in the client’s CRA mail requesting the client file returns for those tax years! How CRA missed that is beyond me! Her 2023 return would have had a refund of $3,600 had we filed the return. My client was not prepared to pay this debt for her deceased sister and chose not to file any tax returns for her sister, including the 2023 final return. I suggested she contact a Trustee in Bankruptcy but I don’t think she did.
From your experience, would a LIT take on such a case? Or are situations like this just dropped and left unclosed considering that this was the deceased debt and not the debt of the survivors finalizing the estate. If a LIT does not take on the file, should my client file these two unfiled tax returns with a letter requesting CRA dismiss the the amounts due since there is no money in the estate to cover the balance due? Would the CRA recoup partial amounts owing from the 2023 final return even though that money could be used to cover other estate expenses which she paid out of pocket, like funeral costs? I’m curious about your thoughts. Thanks.
Thanks for the insight. I stand corrected. Perhaps I misunderstood because the only LITs within a hundred km of my city are employed by the major accounting firms, and they take on the whole job - bankruptcy and tax filing.
@obhorst @indiramajorm - sorry for my error.
I had this question last year.
On death, there is an order for debts to be paid.
The first debt to be paid is that of burial of the deceased. Which is why the death benefit is paid to the person who paid the funeral expenses. The CRA can’t attach to the liquidator’s personal funds (which is why you must absolutely keep trust accounts separate from your personal accounts.)
Once all funds are used for funeral expenses, there is nothing more.
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