Bankruptcy

Does Bankruptcy Clear CRA Debt?

Does bankruptcy clear CRA debt? While bankruptcy can clear some types of CRA debt, it's a solution that comes with significant drawbacks and long-term implications.
Caitlin Carter
November 18, 2023
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Table of Contents

Navigating financial difficulties, especially when they involve tax debt owed to the Canada Revenue Agency (CRA), can be incredibly stressful. Many individuals facing such challenges might consider bankruptcy as an option to reset their financial situation. Let's address whether bankruptcy can clear CRA debt and explore alternative solutions such as debt consolidation with Parachute.

Key Takeaways:

  • Most CRA debt is cleared upon completion of the bankruptcy process, but there are significant consequences.
  • A debt consolidation loan can be a viable alternative to help you handle your CRA debt without some of the larger consequences of bankruptcy.

What Happens to CRA Debt When You Declare Bankruptcy? 

When you declare bankruptcy in Canada, most of your debts are included in the bankruptcy estate and are subsequently discharged upon the completion of the bankruptcy process. This includes debts owed to the CRA, such as personal income taxes, GST/HST, and certain penalties and interest.

However, there are some important caveats and considerations:

  • The tax debts must be for tax years that ended prior to the date of bankruptcy, and you need to have filed any required tax returns for those years. If there are any tax returns that have not been filed, you must file them beforehand to determine the exact amount of tax debt owed.
  • Not all debts to the CRA can be discharged through bankruptcy. For example, debts as a result of fraud, misrepresentation, or penalties relating to tax evasion are typically not dischargeable.
  • Declaring bankruptcy can have significant and long-lasting effects on your credit score, ability to borrow, and can be a public record. It should not be taken lightly and is generally considered a last resort after exploring all other options.

Does the CRA Ever Forgive Debts?

The Canada Revenue Agency offers instalment payment plans, and other taxpayer relief provisions. However, the only way to actually eliminate CRA debt is by working with a Licensed Insolvency Trustee to declare bankruptcy or filing a consumer proposal.

Filing for bankruptcy will eliminate most CRA debts, but comes with other severe consequences. In general, it should be considered only as a last resort.

What Happens if You Owe Revenue Canada Money?

If you owe Revenue Canada money, it’s crucial to make payments towards this debt. The CRA has options for paying your debt in full, making a partial payment, or coming to a payment agreement which will allow you to pay in instalments. If you do not make an attempt to pay, the CRA may take legal action against you. 

What Happens to Your Tax Debt in Canada After Declaring Bankruptcy?

Declaring bankruptcy has several implications, including its impact on future tax debts. Here's an overview of what happens after declaring bankruptcy, particularly concerning tax-related aspects:

  • Discharge of Eligible Debts: In Canada, declaring bankruptcy results in the discharge of eligible debts, including most CRA debt.
  • Non-Dischargeable Tax Debts: Some CRA debts may not be dischargeable in bankruptcy, such as recent income tax debts, unfiled returns, or tax debts related to fraud or misrepresentation.
  • Post-Bankruptcy Tax Obligations: Individuals are still responsible for meeting their tax obligations after bankruptcy, including filing tax returns and paying any taxes owed on income earned post-bankruptcy.
  • Assessment of New Tax Debts: Individuals in Canada are subject to taxation on income earned after bankruptcy. Staying compliant with tax filing requirements and addressing new tax obligations promptly is crucial.
  • Rebuilding Credit: Bankruptcy significantly impacts credit in Canada, and individuals may need to focus on rebuilding creditworthiness. Responsible financial management, including meeting tax obligations, contributes to this process.

Exploring Your Debt Relief Options 

Before considering bankruptcy, it’s important to consider other options for managing debt, like debt consolidation with Parachute. 

A debt consolidation loan is designed to help individuals simplify their debt repayment by combining multiple high-interest debts into a single loan with more favourable terms. The primary goal is to streamline the repayment process, making it more manageable and potentially reducing the overall cost of the debt. 

At Parachute, we’re focused on building our customers’ financial health over time. Here’s what makes us unique: 

  • Cashback for Financial Wellness: Parachute offers an innovative cashback program that rewards you with up to 10% back on your loan when you stay on track with actions that improve your financial health.
  • Consolidation Without New Credit Lines: We help consolidate your existing debt without extending new credit lines, focusing solely on simplifying and reducing your debt burden.
  • Improved Financial Standing: Our core mission is to leave you in better financial shape than you started. After the consolidation term, our customers generally experience improved cash flow, qualify for better interest rates, and enjoy a healthier credit score.
  • Monthly Savings: By consolidating high-interest debt at a lower interest rate, our customers typically save around $300 per month.
  • Tailored Loan Amounts: We offer loans from $5,000 to $25,000 specifically to tackle high-interest debt, such as payday loans and credit cards that can have interest rates way above 46%.
  • Competitive Interest Rates and Terms: With rates ranging from 24.99% to 29.99% and flexible repayment terms from 30 to 60 months, we specialize in relieving customers from predatory interest rates.

By taking advantage of Parachute for debt consolidation, you can manage to pay off your CRA debt over time without the drastic step of declaring bankruptcy. You'll not only handle your tax obligations but also place yourself on a path to financial wellness, saving money, and rebuilding credit along the way.

Conclusion

In summary, while bankruptcy can clear some types of CRA debt, it's a solution that comes with significant drawbacks and long-term implications. As a compassionate personal finance expert at Parachute, I encourage you to explore alternatives like debt consolidation to regain financial stability without the severe consequences of bankruptcy. Consider reaching out to a financial advisor to review your personal circumstances and to see if a solution like Parachute is the right fit for you. 

Remember, there's often a parachute you can deploy before considering the jump into bankruptcy.

Caitlin Carter
Caitlin Carter, Parachute’s, Head of Customer Success lives and breathes well-being - her passion over the last few years is how well-being is impacted by finances and conversely how finances are impacted by our well-being. She has a 15+ year career helping international brands execute on their global education and development strategy as well as define and monitor their operational KPIs.
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