Personal Tax Debt Obligations for Corporate Tax Debts from Limited Company
The following message was sent via the contact form on CECraig.com:
I am in a situation that I have been running from for a while. I know that I need to declare bankruptcy as I owe in excess of $60,000 and haven’t made a payment in over 3 years. My problem lies in that it is partly from a failed business (CRA) so I have corporate and personal tax debts, and my Taxes need to be updated in both cases without paperwork available.
Basically, I don’t know where to begin if I have to declare bankruptcy or what?
Can you help?
Thank you for your time,
Yes, we can definitely help you with you CRA issues both corporate and personal tax debts.
If you have personal debt obligations that encompass both corporate and personal debts, then both of these can be addressed in a personal bankruptcy or consumer proposal if the corporation has shut down or ceased to operate. Even if the company is still operating, we can help your address your personal debts but it does take a bit more review by the trustee.
As a Director of the corporation you can be left with Director obligation for CRA with respect to some of the corporate debt, but also an “obligation to file” any outstanding tax returns. Upon a personal formal application with a bankruptcy trustee, either proposal or bankruptcy, any and all financial obligations to CRA are addressed and form part of the debt that can be discharged. However, sometimes CRA insists that outstanding filings are to be prepared so they can determine how much you actually owe them. This is especially true if you are trying to file a Consumer Proposal where we need to establish a pretty clear baseline of how much you actually owe to each creditor so we can calculate a potential payout to creditors under the proposal. In a bankruptcy this is even less important in being completed at the outset of the file and thus can be determined after the bankruptcy is started if needed.
In practice, if in a bankruptcy the creditors are to receive little or no payout, then coming up with a hard number as to what you actually owe to CRA is unimportant – nothing paid towards of a debt of $1 is exactly the same as nothing paid towards a debt of $1,000 – i.e. the CRA still receives nothing. So in a personal bankruptcy quite often CRA does not spend any time reviewing the corporate debt. Further, and this is the case in most circumstances, if the corporation has ceased to operate, once you declare bankruptcy they simply no longer bother to be concerned about the corporation and so you do not even have to file the outstanding returns. Sometimes people just do their best to file the outstanding returns with a note attached to CRA saying something like “this is the best guess as to what I owe you, but I no longer have records to support or confirm these balances – Sorry”.
At times, CRA just assess or log their own guess what you owe them and this can serve as a calculation towards your outstanding debt.
So going on with the analysis above, if you have operated a small corporation and simply no longer have access to books and records of the company and it has ceased to operate, you can come to a trustee to review your personal financial obligation. Even if it is still operating but no longer solvent, we can help you with your personal debts but a review of the operation of the company would be needed to be done to see which avenue would be the best for you.
As trustee in a personal bankruptcy, during the course of the bankruptcy, we are obliged under law to file any outstanding personal tax returns for the current tax year and the immediately preceding year. So, if you went bankrupt today, February 2016, we would file the 2016 tax return for you (Pre and Post) and the 2015 tax return, if it was outstanding. If your personal income in 2016/15 had income from your corporation, then we would have to determine what that income number would be, if anything. Most times for small businesses we find that the Directors/Shareholders have put significantly more money into the company than they actually received back (in terms of debt on credit cards, lines of credit etc.) so there really is no inclusion of income. But, this calculation can be done after the bankruptcy is started and does not have to be done up front.
If you wanted to file a Consumer Proposal to deal with your personal debts (corporations cannot file consumer proposals) then we would have to put some work into determining, to the best of our ability, your outstanding tax obligations PRIOR to the filing of the proposal. There is a rule from CRA where they will not consider a Consumer Proposal if all outstanding returns are not complete. You need 50% acceptance from your creditors in a Consumer Proposal to bind all your creditors, so if CRA is a large portion of your debts, then we have to file the returns prior to filing the proposal. Once again though, sometimes people file their outstanding returns with “this is the best information I have” notice to CRA and hope for the best.
Or, just declare bankruptcy and make a fresh start.
Anyway, hopefully that helps with your question. We offer a free office consultation if you would like to discuss your situation further.
Colleen E Craig