Bankruptcy and Tax Debt: What Happens to Your CRA Debts if You Go Bankrupt? – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Many Canadians facing overwhelming tax debt believe that bankruptcy will automatically erase their balance with the Canada Revenue Agency (CRA). The truth is more complex. While bankruptcy can discharge many tax debts, certain CRA balances—such as source deductions, fraud-related assessments, or director’s liability—may survive bankruptcy. Understanding exactly what happens to tax debt in bankruptcy is essential for anyone struggling with CRA collections, wage garnishments, bank freezes, or aggressive enforcement. This guide explains how CRA debt is treated in bankruptcy, what is discharged, what survives, and the strategic considerations before filing.

Legal and Regulatory Framework

Bankruptcy and insolvency in Canada are governed by the Bankruptcy and Insolvency Act (BIA). CRA debt is treated as an unsecured debt, meaning it can be discharged unless it falls under special categories. CRA maintains strong collection powers before bankruptcy—including garnishments and bank freezes—but these powers stop once a bankruptcy is filed. Licensed Insolvency Trustees (LITs) administer the process, and CRA participates like any other creditor for most tax debts. Exceptions exist for fraud, misrepresentation, and trust debts.

Key Court Decisions

In Canada v. Morris, the court confirmed that most income tax debts are dischargeable through bankruptcy. In Re: MacLeod, GST collected but not remitted was deemed a “trust amount” and not dischargeable. In Duplessis v. Canada, the court held that director’s liability for payroll deductions may survive bankruptcy unless paid through the estate. These cases demonstrate that tax debt treatment depends on the nature of the debt.

Which CRA Debts Are Dischargeable in Bankruptcy?

1. Personal Income Tax Debt

Most personal tax debts, including reassessments, interest, and penalties, are fully dischargeable.

2. GST/HST Net Tax Balances

GST/HST owed as part of your business operations is typically dischargeable.

3. Corporate Tax Debt (if personally liable as a guarantor)

If you guaranteed a corporate tax loan, bankruptcy may eliminate your guarantee liability.

4. Tax Penalties and Interest

Most penalties—including late-filing, repeated-failure penalties, and gross negligence penalties—are dischargeable.

5. Old or Multi-Year CRA Debt

Bankruptcy can eliminate years of accumulated interest and balances.

Which CRA Debts CANNOT Be Eliminated?

1. GST/HST and Payroll “Trust Debts”

Amounts withheld in trust from others (e.g., customers, employees) are not dischargeable:

• Source deductions (CPP/QPP, EI/QPIP, income tax)

• GST/HST collected but not remitted
  CRA views these as someone else’s money.

2. Director’s Liability Assessments

Corporate directors are personally responsible for:

• Source deductions

• GST/HST trust amounts
  These debts often survive bankruptcy unless fully dealt with through the estate.

3. Fraud-Related CRA Assessments

If CRA proves the debt arose from fraud or willful misrepresentation, it will not be discharged.

4. Court-Imposed Fines and Penalties

Tax-related criminal penalties or court fines remain enforceable.

What Happens to CRA Collections When You File Bankruptcy?

At the moment of filing:

• CRA must stop all collection actions

• Wage garnishments end

• Bank account freezes must be lifted

• CRA cannot call or demand payment

• CRA must file as an unsecured creditor
  This “stay of proceedings” gives you breathing room.

Steps in Handling CRA Debt Through Bankruptcy

1. Meet With a Licensed Insolvency Trustee

Bankruptcy cannot be filed through an accountant—only a LIT can administer it.

2. Provide CRA Debt Documentation

Bring Notices of Assessment, Reassessments, Statements of Account, and correspondence.

3. File the Bankruptcy

The stay begins immediately.

4. CRA Submits a Claim

CRA files a proof of claim with the trustee.

5. Complete Bankruptcy Duties

Attend counseling sessions, provide income statements, and submit required paperwork.

6. Receive Discharge

Typically 9–21 months, depending on income and first vs. second bankruptcy.

Alternatives to Bankruptcy for CRA Debt

Bankruptcy is not the only option. Consider:

• Consumer Proposal (negotiated settlement for a portion of the debt)

• CRA Payment Arrangements (monthly payment plan)

• Taxpayer Relief (cancel interest/penalties)

• Notice of Objection (if CRA assessed incorrectly)

• Voluntary Disclosure (to correct errors safely)
  Bankruptcy should be the last resort.

Consequences of Filing Bankruptcy for CRA Debt

• Loss of certain assets

• Credit rating reset

• Difficulty obtaining future financing

• Loss of ability to act as a corporation’s director during bankruptcy

• Public record of bankruptcy filing
  These consequences must be weighed carefully.

Mackisen Strategy

At Mackisen CPA Montreal, we analyze CRA debt to determine whether bankruptcy is truly necessary—or whether tax appeals, payment plans, or penalty relief can resolve the issue. When bankruptcy is appropriate, we coordinate with Licensed Insolvency Trustees and ensure CRA claims are properly categorized. We also challenge incorrect CRA assessments before bankruptcy to reduce exposure.

Real Client Experience

A Montreal contractor discharged $180,000 of old CRA debt through bankruptcy. A self-employed client avoided bankruptcy after we reversed a faulty CRA reassessment. A business owner eliminated wage garnishments through a consumer proposal. A director reduced personal liability for payroll deductions by correcting corporate filings before bankruptcy.

Common Questions

Does bankruptcy erase CRA tax debt? Often yes—but not trust debts. Will CRA stop collections during bankruptcy? Yes, immediately. Can I go bankrupt for GST/HST? Yes, but only net tax—not trust money. Can bankruptcy remove penalties and interest? Yes.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal provides strategic guidance for CRA debt resolution—including analysis of bankruptcy options, dispute strategies, and alternatives that protect your financial future.