Tax Refunds, Tax Debts and Immigration Questions And How They Affect When You Should File
Today's podcast was a little different than past segments. Starting today, the last show of every month will focus on frequently asked questions. Today we talked about a few issues, two of which included questions around when you should file bankruptcy.
Ian Martin, a Chartered Accountant and Trustee in Bankruptcy at Hoyes Michalos, explained how a tax refund or tax debt may impact what time of year you might want to file. Howard Hayes, another Hoyes Michalos trustee and in-house expert on immigration and bankruptcy, tells us how debt can impact the immigration and citizenship process in Canada and how this can also affect when you should file bankruptcy.
Ian Weighs In On Timing For Filing A Bankruptcy Or A Proposal
Does the time of year matter when you're considering filing a bankruptcy?
Ian explains that the time you declare bankruptcy can mean the difference between losing only one year's refund or losing multiple refunds. It all depends on whether or not you have filed your taxes, and received your refund, for the year before you declare bankruptcy.
For starters, the rule is you will not receive a tax refund (if there is one) for the year that you filed bankruptcy. So if you file bankruptcy in 2015, you lose your tax refund for the tax year 2015.
Here's where timing matters. If you file bankruptcy in 2015 but have not yet filed your 2014 income tax return, perhaps because it's early in the year and you don't have your T4 yet, you will also lose any refund you are entitled to for 2015. Bankruptcy law dictates that any tax refunds owing for years prior to your bankruptcy will also be lost. If you file bankruptcy in February you will lose two refunds; the refund for 2015 because it is automatically included in your bankruptcy, and 2014 because it is considered outstanding.
The solution? You can wait to declare bankruptcy until after you have filed your 2014 tax return and received your tax refund for that year. That way you lose only one refund.
Does the time of year matter when you're considering filing a consumer proposal?
One key difference between a bankruptcy and consumer proposal is that you keep your assets, and that includes any tax refund owing to you. So you don't lose any tax refunds in a proposal.
There is however still a timing issue to consider when filing a proposal if you owe money, or will owe money, to Canada Revenue Agency. Your proposal will include all tax debt up until the year of filing but not any owing for the year you file your proposal.
What that means is if you file a proposal on December 29 and owe taxes for that year, those tax debts are not automatically included in your proposal. If you wait until January 2, then your prior year tax debts will roll into the proposal. In most case, unless there is a wage garnishment or other legal action pending, it's best to wait to the new year if you can.
Howard Weighs In About The Impact Of Debt On Immigration
We are frequently asked how debt can impact a person's immigration to Canada. I sat down with Howard Hayes, Trustee in Bankruptcy at Hoyes Michalos. Howard was born in Lincolnshire, England (about a three hour drive north of London). Having filed for Canadian citizenship, Howard has first hand experience with the process. When considering how debt might affect this process, Howard explained that the differences between immigration and citizenship matter.
Immigration - the right to be able to come and live in Canada.
Citizenship - becoming a citizen of this country, entitled to a passport and the right to vote.
Debt plays a factor when considering immigration or becoming a sponsor for someone to come to Canada. Howard explains that,
when you're sponsoring someone, you're essentially taking on a financial responsibility and commitment to the person you're trying to sponsor to come into Canada.
The government wants to ensure that the person entering the country will not be a financial burden on existing tax payers, reaping the benefits of social assistance.
So what financial issues disqualify you from sponsoring an immigrant?
- Owing child support
- Previously sponsoring someone who had to claim benefits because they couldn't find work. You will not be permit to sponsor a second individual until the government has been paid back.
- Outstanding immigration loans - loans provided by the government to fund an immigrant's transportation costs for physically entering the country.
- Uncompleted bankruptcy - if you have not been discharged from your bankruptcy, you will not be permitted to act as a sponsor.
How does this affect your bankruptcy timing?
What that means from a timing perspective is if you think you’re going to have to go bankrupt, you may want to do that bankruptcy, and get it finished, before the sponsorship process starts. You can try to sponsor someone first and deal with your debts later, but because the sponsorship process can take a long time this is a risky strategy. Filing bankruptcy in the middle of a sponsorship can jeopardize the end result.
Other questions answered on today's show:
- Who Will Find Out If I Go Bankrupt?
- Should I Feel Bad About Filing Bankruptcy?
Resources Mentioned in the Show
For more information about how sponsorship could be affected by debt, see Howard's article, "Bankruptcy, Sponsorship, and Citizenship in Canada".
More bankruptcy and proposal related questions and answers can be found on our two FAQ pages:
A full transcript of our Bankruptcy FAQ show: Taxes and Immigration Issues can be found here.