Bankruptcy: The End or the Beginning?

Bankruptcy: The End or the Beginning?

Personal Income Tax Debtors

There have been too many tax-driven personal bankruptcies. Some individuals have achieved the nefarious reputation of having had multiple personal income tax-driven bankruptcies. As of September 18, 2009, the BIA addresses the problem of chronic personal income tax debtors who go bankrupt solely or primarily to wipe out personal income tax debt.

A bankrupt with $200,000 or more of personal income tax debt representing 75% or more of the total unsecured proven claims against the bankrupt is not eligible for an automatic discharge from bankruptcy. “Personal income tax debt” means personal income tax payable under the Income Tax Act or similar tax payable under any provincial legislation including any interest, penalties, or fines. A personal income tax debtor who is a first-time bankrupt may apply to the bankruptcy court for a discharge after nine months in bankruptcy if the bankrupt has not had to pay any surplus income to the trustee. Otherwise the bankrupt must wait 21 months before seeking a discharge. Such a personal income tax debtor, who is a second-time bankrupt with no surplus income, is not eligible to apply for a discharge until 24 months after the date of the bankruptcy. A second-time bankrupt with surplus income payable to the trustee must wait 36 months before being eligible to apply for a discharge. All other personal income tax debtors who are more repetitive bankrupts must wait 36 months after the date of bankruptcy before being eligible to apply to the bankruptcy court for a discharge. The bankruptcy court can refuse the discharge, suspend the discharge, or grant a conditional discharge. An absolute discharge is not available to these personal income tax debtors.


Society embraces optimism and forgets pain. Historically (mid-1500s to present), changes to bankruptcy legislation when the economy was strong made the process more rigorous for debtors and changes made during an economic downturn were more lenient for rehabilitation of debtors.

Canada’s present bankruptcy law for government student loan debt is a work-in-progress. The personal bankruptcy playing field is more level for RRSPs and RRIFs going forward.

Bankruptcy must not operate as a clearinghouse for repeat bankrupts and excessive personal income tax debt. Protecting the integrity of the bankruptcy system is the top priority.

These topics and many more must be discussed thoroughly and candidly with a licenced trustee in bankruptcy when a person is contemplating the debtor relief provided for in the BIA.

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C. J. Shaw, Q.C.
C. J. Shaw, Q.C., LL.M. is a member of the Alberta and Nova Scotia Bars and practises banking and insolvency law with Leon Bickman Brener in Calgary. He teaches Unsecured Creditors’ Remedies and Bankruptcy and Restructuring Law in the Faculty of Law, University of Calgary.

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