Tax season can feel stressful, especially if you’re already managing financial challenges or considering debt relief options. One of our most common concerns is: “What happens to my taxes, refunds, and GST credits if I file for bankruptcy or a consumer proposal?”

The good news is that both options provide protection from the Canada Revenue Agency (CRA) and can help resolve tax debt. However, how your tax returns, refunds, and credits are treated depends on your route.

Crowe MacKay & Company explains how tax obligations are managed during bankruptcy and consumer proposals—and what you can expect moving forward.

Understanding How Bankruptcy and Consumer Proposals Affect Taxes in Canada

Both bankruptcy and consumer proposals fall under the Bankruptcy and Insolvency Act (BIA), which outlines how CRA debt, refunds, and government benefits are handled. While both options can eliminate or reduce tax debt, they differ in how they manage refunds and ongoing tax filings.

Bankruptcy: How It Impacts Your Taxes and Refunds

Tax Debt in Bankruptcy

In most cases, CRA debt is dischargeable through bankruptcy. This includes:

• Personal income tax debt
  
• GST/HST debt
• Director’s liability for unremitted taxes

Once you file, the Stay of Proceedings takes effect—meaning CRA must immediately stop all collection activity, wage garnishments, or bank freezes.

Any tax debt incurred up to the filing date is included in the bankruptcy. However, your responsibility is to pay the new tax debt arising after the bankruptcy date.

Filing Your Tax Returns During Bankruptcy

When you file for bankruptcy, your Licensed Insolvency Trustee (LIT) will handle part of your tax filing obligations.

Two tax returns are prepared for the year in which bankruptcy is declared:

1. Pre-bankruptcy return – covering January 1 up to the filing date.
2. Post-bankruptcy return – covering the period from the date of bankruptcy to December 31.

If you have unfiled returns from previous years, your LIT will help ensure they are submitted to the CRA.

Any tax refunds from the pre-bankruptcy or post-bankruptcy period (and prior years) become property of the bankruptcy estate. These funds go toward repaying creditors.

Important: Failing to provide your LIT with tax information can delay your discharge from bankruptcy.

GST Credits and Other Government Payments

During the bankruptcy:

• Tax refunds, GST Credits, and the BC Climate Action Tax Credit (BCCATC) are sent directly to the LIT for distribution to creditors.
• Under Rule 59 of the BIA, GST Credits only become property of the bankruptcy if no dividends are available to creditors.
• Once the bankruptcy closes and you receive your discharge, future credits and refunds are paid directly to you again.

A bankruptcy does not affect your eligibility for Canada Child Benefit payments or pensions.

Consumer Proposal: How Taxes and Credits Are Treated Differently

Tax Debt in a Consumer Proposal

With a consumer proposal, the CRA is treated as an unsecured creditor for most types of tax debt. The proposal includes all CRA debt up to the filing date.

After the proposal is filed, interest and collection activity stop immediately, providing breathing room while you make affordable monthly payments toward a reduced total balance.

Tax Filing During a Proposal

At the time of filing:

• All prior-year tax returns must be filed.
• The LIT may file a provisional tax return for the period before the proposal was submitted.

Afterward, you file your taxes as usual and pay any new taxes owing each year. Maintaining up-to-date tax filings is essential to remain in good standing during the proposal.

Refunds, GST Credits, and Other Government Payments

In a proposal, you remain in control of your tax refunds and credits:

• Refunds and GST Credits are issued directly to you.
• The LIT and creditors have no claim on new refunds or credits earned after the filing date.
• CRA cannot redirect or apply these payments toward old tax debt included in your proposal.

When CRA Interest and Penalties Apply

As of 2023, the CRA’s prescribed interest rate increased to 8%, meaning interest on overdue taxes can accumulate quickly.

Until you file a bankruptcy or consumer proposal, interest continues to grow—making it crucial to seek professional advice early before balances become unmanageable.

Once a proposal or bankruptcy is filed, interest and penalties immediately stop, and CRA must abide by the Stay of Proceedings.

When Tax Debt May Survive Bankruptcy or a Proposal

While most tax debt is dischargeable, there are a few exceptions. Debts that may survive include:

• Tax debts are subject to a demand under subsection 224(1.2) of the Income Tax Act or similar provincial provisions.
• Debts arising from fraudulent misrepresentation or unfiled tax returns.

If you’re unsure whether your tax debt qualifies, your LIT can review your file and clarify which debts are dischargeable.

Choosing Between Bankruptcy and a Consumer Proposal

Both options can relieve CRA debt—but they serve different financial needs.

• Bankruptcy offers a fresh start, wiping out most unsecured debts (including CRA tax debt) if you cannot afford to repay them.

→ Learn more about Bankruptcy → [Click here]

• A Consumer Proposal allows you to repay a portion of your debt through a legally binding plan, often avoiding bankruptcy.
  

 → Learn more about Consumer Proposals → [Click here]

Key Takeaways: Taxes and GST Credits in Debt Relief

• CRA debt is treated like other unsecured debt and is usually dischargeable.
  
• Tax refunds during bankruptcy go to the LIT; in a proposal, you keep them.
  
• GST Credits and BCCATC are sent to the LIT only during an active bankruptcy.
  
• Interest on overdue taxes stops once a bankruptcy or proposal is filed.
  
• Staying current on tax filings ensures smoother proceedings and protects your discharge or proposal completion.

Start Your Debt Relief Journey Today

If you’re worried about tax debt, unfiled returns, or CRA collections, you’re not alone—and help is available.

At Crowe MacKay & Company, our team have over 50 years of experience helping individuals navigate tax obligations and regain financial stability.

Contact us for a free, confidential consultation to discuss your options and find a path that fits your situation.