During the process of Bankruptcy it is common to file a pre-bankruptcy and post-bankruptcy personal income tax return. The key significance of the tax returns is the dischargeability of the tax liability owed to the CRA. The pre-bankruptcy tax liability may be dischargeable while the post-bankruptcy liability is not dischargeable.

Key takeaways:

• Bankruptcy taxation year is split into two periods, i) pre-bankruptcy and ii) post-bankruptcy.
• Each requires a separate personal income tax return filing by your LIT (Licensed insolvency trust) or in some cases Tax accountant.
• Post-bankruptcy tax liability cannot be protected under despite bankruptcy.
• A pre-bankruptcy tax return refund can be seized by the CRA to offset other tax liabilities owed.
• Prior bankruptcy tax returns and outstanding tax returns should be filed as part of the bankruptcy process.
• It is mandatory to file bankruptcy tax returns to ensure no disruptions in bankruptcy process, penalties, benefits etc.

Prior-Bankruptcy Personal Income Tax Return

Usually the LIT you are working with will ensure you have filed at least the personal income tax return for the year prior to bankruptcy. For example, if bankruptcy is in 2025, your LIT will have to file the 2024 personal income tax return. It is usually advised during the process that any outstanding personal income tax returns are filed with the CRA, tax refunds will usually go to your LIT to distribute to creditors, and taxes owed are usually sheltered within the bankruptcy.

Pre-Bankruptcy Personal Income Tax Return

The pre-bankruptcy period is up to the date before the date of official bankruptcy, for example, if the date of bankruptcy is July 1, 2025, the date pre-bankruptcy personal tax return will cover January 1, 2025 to June 30, 2025.  A new taxation year will begin July 1, 2025 to December 31, 2025 for the remainder of the year.

The pre-bankruptcy income tax return will basically all income earned up until before bankruptcy. The taxes are usually not owed and you are protected under the bankruptcy. If there is a refund the CRA can apply it to outstanding CRA debts, otherwise, it will be refunded to the LIT to distribute to creditors etc. This tax return is usually filed by the LIT.

Post-Bankruptcy Personal Income Tax Return

The post-bankruptcy period is from the date of bankruptcy to the calendar year end. For example, if the date of bankruptcy is May 25, 2025, the post-bankruptcy tax return will cover May 25, 2025 to December 31, 2025.

This tax return will report all income earned post-bankruptcy. The taxes owing must be paid by the bankrupt and are not protected under the bankruptcy. It is possible of there is a post-bankruptcy refund the CRA apply to outstanding debts, or seize if there is an enforcement maintenance registered with CRA.