For one reason or another, most people who come to see me for advice seem to believe that tax debt will not be included in a bankruptcy. When I ask them why they have this preconception, most people simply say, that is what I was told.
In reality, the vast majority of tax debts are in fact discharged with a bankruptcy. Some tax debts get special treatment under the bankruptcy laws, however, the vast majority will disappear once a bankruptcy is discharged.
All personal income tax debts can be eliminated with a bankruptcy. If you owe more than $200,000 in personal income tax (not directors’ liabilities for GST / QST / HST or Deductions at Source) and this amount represents more than 75% of your total debts, you must get a discharge from the Court, as opposed to the usual automatic discharge. Interest and penalties are included when determining the amount of the tax debt. Any director’s liabilities are not counted towards this $200,000 threshold but are still cleared up with a discharge.
Once a tax debt has been registered on an immovable (real property), it can no longer be discharged in a bankruptcy and must be paid in full on the sale of the immovable. This means that if the tax debt has been registered as a legal hypothec (mortgage) on a property, it will continue to accrue interest and will have to be paid when the property is sold.
If you think you are in trouble with taxes and that you may need help, consult with a Licensed Insolvency Trustee. Most offer free consultations and they are the right professionals to help you understand the options available to you to help with your tax troubles.