Income tax debts are unsecured debts and, as such, the debt will be extinguished as a result of bankruptcy.
HST is also an unsecured claim in bankruptcy. If you were self employed and owe HST, then your bankruptcy will extinguish your obligation to pay the outstanding HST.
If you were self-employed and have unpaid source deductions then that claim, too, is extinguished through the bankruptcy process, although the claim ranks first against non-exempt assets.
Canada Revenue Agency (“CRA”) has the right to garnish wages, but this right ceases on bankruptcy. Thus if you owe tax and have not yet filed for bankruptcy, CRA can send a garnishment notice to your employer which will result in a portion of your wages or salary being withheld and sent to CRA.
Once you file for bankruptcy, the garnishment will be stopped immediately as CRA cannot continue with collection proceedings once a person is bankrupt, just as a credit card company or other unsecured creditor is prohibited from continuing collection activities.
Income taxes, HST and source deductions that arise for the period after bankruptcy must, however, be paid as they are “post-bankruptcy” debts.
Lawrence Crandall, LL.B, CIRP, Licensed Insolvency Trustee
Licensed Insolvency Trustees
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