In Tax Debt Hole? Stop Digging!

A recent case of a serial tax debtor illustrates the basic rule that once you find yourself with a debt problem its best to stop digging yourself deeper into debt.

The unfortunate reality of what we see all too often as trustees is that people with big tax debts file for bankruptcy to get protection but don’t follow through with getting themselves out of bankruptcy and out of debt. Instead they don’t comply with their duties and obligations in the bankruptcy and simply fall back into old patterns of not remitting taxes. Next thing you know the problem only gets bigger and even more irreversible.

The case in question involved a Vancouver medical expert who was clearly a high income earner but was not so good at remitting his taxes. He filed for bankruptcy in 2009 with an accrued tax debt of almost $500,000 for the tax years 2002 through 2008. In 2011 the trustee in the bankruptcy was discharged without the debtor being discharged. The facts of the case don’t explain why this occurred but a good guess would be that the debtor either was not complying with his duties in the bankruptcy or making any worthwhile attempts to deal with a conditional discharge he may have received. In this case there was no discharge order so we can assume that the debtor didn’t even comply with his basic duties.

Stay of Proceedings Lifted

Once the trustee had been discharged, the automatic stay of proceedings was lifted. Shortly thereafter, CRA began garnishing his income. In need of help again the debtor managed to obtain the services of another trustee who agreed to be appointed in his bankruptcy and reinstitute the stay of proceedings (clearly the original trustee wanted no further involvement). The second trustee then brought an application to the court to have CRA actions stopped.

However, CRA was now garnishing not only pre-bankruptcy tax debts but also post-bankruptcy tax debts as well. The trustee argued that all debts are covered by the stay. Unfortunately, the court ruled that the post-bankruptcy tax debt were not a “provable claim’ in the bankruptcy as they did not exist as at the date of bankruptcy and therefore they were not subject to the automatic stay.

Avoid an impossible tax debt problem

A few key points to take away from this case are as follows:

  • A bankruptcy filing (or proposal) will give an automatic stay of proceedings from tax collections. The relief is immediate but that is only the first step in dealing with the debt.
  • Once you are in bankruptcy, the first goal is to get to your discharge hearing in a position to show the court that you have complied with your duties and have made a meaningful change in how you manage your financial affairs. (If you are a high tax debtor of over $200,000 in taxes there is automatically a discharge hearing but CRA can still oppose the discharge if they choose to for less tax debt).
  • Continuing to accumulate tax debt after your date of bankruptcy will at the very least be frowned upon by the court at your discharge but can also lead to a virtually impossible situation to get out of. CRA can garnish you for post bankruptcy tax debts thus reducing your income and making it impossible to pay any amount you were required to pay in your bankruptcy. Filing a second bankruptcy can not be done until you have been discharged from the first.

As previously stated, this is a situation that we see all too often with self employed individuals who a chronic non-payers of their income taxes. Don’t let it happen to you. Call us today to discuss a realistic plan to deal with your tax debt.