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.
When you file bankruptcy you’re required to make a payment into your bankruptcy estate each month based on your income. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos and Associates. Today I’m going to explain a Canadian bankruptcy concept called surplus income. This is an important topic because it will affect how much your bankruptcy will cost and how long you’ll be bankrupt.
Bankruptcy in Canada is based on the principle that the more you make the more you have to repay your creditors. This makes sense when you think about it. Someone making $150,000 a year should have to pay more to eliminate their debt through bankruptcy, than someone who makes say $30,000 a year. To do this, the government sets a limit on what they think you and your family need to cover your necessary living expenses. These limits change every year with inflation, but the idea is a simple one. If your monthly income, less certain allowable expenses, is above this limit, the government says you have to pay one half of the amount you’re over the limit, into your bankruptcy as a surplus income penalty.
How does your trustee know what your income is?
While you’re bankrupt you’ll send your trustee proof of your income and expenses each month. You’ll send in copies of your pay stubs and proof of any other income, and receipts for things like medical expenses, childcare costs and support payments you make, and your trustee will calculate how much you’re required to pay. The more you’re over the limit the more you pay, but it’s not just about the money.
Surplus income is actually a two-part penalty. Not only do you have to pay more if you earn over the limit, but you will also be bankrupt longer. You can watch our video on how long your bankruptcy will last but for a first-time bankrupt, if you have surplus income your bankruptcy will be extended for an extra year, from the minimum nine months to 21 months. And if you’re a second-time bankrupt with surplus income you’re bankruptcy is also extended by a year, from the minimum two years to three years. So, if you have surplus income you will make higher bankruptcy payments and make those payments for a lot longer. This can make the cost of bankruptcy very expensive.
Is there a way to avoid the surplus income penalty?
Yes, file a consumer proposal. Before you file bankruptcy you’ll have a free consultation with your trustee. Be honest with them about how much you think your income will be during your bankruptcy. Tell them everything, because it’s not just about your regular paycheque but also includes any commissions or bonuses you may receive. With full information your trustee can help you estimate your potential surplus income payments while you’re bankrupt. If you think you will have surplus income, you could take what you expect to pay in surplus income over a 21-month bankruptcy and offer a consumer proposal where you make payments to your creditors over up to 60 months. Your creditors will expect you to offer a little extra in a proposal as compared to a bankruptcy, but you’re happy because the monthly cost to eliminate your debts is much more affordable.
Surplus income is complicated and can be costly, so you need to understand it fully when considering bankruptcy. Make sure you discuss anything that can affect your expected income with your trustee as part of the consultation process so that you can make an informed decision about whether bankruptcy is the right option for you.
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.