What is Surplus Income?
Surplus income is one component in the cost of bankruptcy in Canada. The concept is simple. The government dictates that the more you make, the more you will pay into your bankruptcy.
The Canadian government has set net monthly income surplus income thresholds for a person or a family to maintain a reasonable standard of living in Canada. How much you will have to pay in a bankruptcy, and how long you have to pay, is determined by these surplus income rules. These bankruptcy Canada surplus income rules apply in all bankruptcies, regardless of where you live.
Every dollar that a bankrupt family makes above the level set by the government is subject to a surplus income payment of 50% while a person remains bankrupt.
Table: Income threshold by family size*:
*2020 surplus income limits set by the OSB
Surplus income also affects how long your bankruptcy will last. Based on rules implemented by the federal government, if your surplus income each month is greater than $200 (meaning you are paying the bankruptcy trustee more than $100 per month in surplus income payments), your bankruptcy is automatically extended. A first bankruptcy is automatically extended for 12 months, and you are required to continue paying your surplus income payment for an additional 12 months. A second bankruptcy with surplus income is extended to a total of 36 months.
Since surplus income affects the cost of your bankruptcy, and potentially the length of time you will be bankrupt, it is important that you discuss your potential for surplus income with a trustee, before filing for bankruptcy. When you meet with your Licensed Insolvency Trustee, we work with you to estimate this number before you file. If your surplus income is more than you can afford each month, talk to us about the cost of a consumer proposal as a way to lower your monthly payments.
How is surplus income determined?
How surplus income is calculated, is defined under the Bankruptcy & Insolvency Act. It varies for each individual based on their family circumstances. Whether or not you will have to make surplus income payments, and how much you will have to pay, will depend upon:
- How much your family earns each month;
- How many dependents are in your household;
- The extent of eligible expenses you may be allowed to deduct.
Basically the government allows you to earn a certain amount (the surplus income threshold); if you earn more than that amount a portion of your surplus income is contributed to your estate. If you are off sick during the month you may end up paying less; if you work overtime you may be required to pay more.
If you go bankrupt, you are required submit proof of your family income to your Hoyes Michalos Licensed Insolvency Trustee. Each month that you are bankrupt you will send your trustee copies of your pay stubs and proof of any other income you have (such as child tax credits, pensions, or unemployment insurance), and based on your income the trustee calculates how much you are required to contribute to your estate.
Calculating Surplus Income Payments
Under the surplus income rules, the monthly surplus income payment is calculated using the following formula:
Net Income – Threshold = Surplus x 50 % = Payment
Here’s a simple example: John lives alone and his take home pay is $2,848 per month. Using the above formula, the monthly surplus income payment that he is required to make would be:
$2,848 – $2,248 = $600 x .5 = $300
In this example John is required to pay $300 in surplus income payments each month that he is bankrupt. Each month John will submit his paystubs, and each month this number is re-calculated. If John’s pay increases, he will pay more. If his pay decreases, he will pay less.
The amount of surplus income you are required to pay is based on the following:
- Net Income includes the take home pay of everyone living in the household of the bankrupt. If in our example John had a wife, her income would have been added to John’s to determine the total household income.
- Deductions include: support payments, child care payments, medical bills, fines and penalties, any other employment expense that you normally deduct when preparing your income taxes.
- Threshold: set by the Office of the Superintendent of Bankruptcy. It is based on the number of persons living with the bankrupt. Please use our free surplus income calculator for more details.
- Payment: if more than one person’s income is included in the Net Income figure, the required payment is pro-rated to each person based on their income’s percentage of the total.
Surplus income can have a significant effect on the total cost of bankruptcy. Our free bankruptcy surplus income calculator can help you determine what your required surplus income payments may be.
If you have any questions on how the calculation works, or whether or not something is deductible, please contact one of our Ontario bankruptcy offices.
Surplus income payments are required by law. The Bankruptcy & Insolvency Act clearly sets out how to calculate the required payment and your bankruptcy trustee is required to report to the Court whether or not those payments have been made. If the required payments are not made, you will NOT be discharged from bankruptcy.
There are alternatives to bankruptcy that can help you avoid high surplus income payments. Talk to one of our bankruptcy trustees about how a consumer proposal can lower your monthly payments.